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Have You Wondered Why The Crypto Crash is Happening? Here Are Five Reasons

Joseph Ekeng
Coinmonks

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Highlights

  • UST faced an attack that caused it to depeg from the US dollar
  • Fed interest rate Hike triggered selling pressure, resulting in plummeting token prices
  • Amid macroeconomic uncertainties, Institutional investors have abandoned riskier assets
  • Price volatility is second nature to the crypto market

It’s not yet clear if the current calm in the market is an indication that the bear run may have come to an end. But the last 48 hours have seen some level of stability in the market after the volatility of the last couple of months that has seen investors lose billions and the confidence of many in the crypto market has been shaken to its roots.

The biggest losers have been those who held positions in stablecoins. That crypto niche has seen more than 90 per cent of its token value wiped out within a couple of weeks. LUNA which traded at $117 just about a month ago, is currently less than a dollar in token price.

Perhaps the biggest question in the minds of traders, especially the new entrants be would, what is the cause of this extraordinary market crash? This article will highlight several factors that experts believe have played significant parts in this raging bear market.

Attack on UST

Well, it is probably impossible to be 100 per cent accurate on the cause of the crypto market crash but there is a consensus that it started with a liquidity attack on Terra’s UST, which until last month, was the largest stablecoins by market cap behind USDT and USDC.

There is a general sense that the attack may have been deliberate and that it was initiated by a large entity with deep pockets, considering that most of the initial sales were done in $300, 000 increments, according to Marija Matic, a crypto analyst at Weiss Crypto.

Following the attack, UST lost its peg to the dollar as it fell slightly below $1.

Thereafter it appeared the attack intensified as selling pressure continued to expand, causing a more significant depegging. Consequently, as the price of UST fell even further, panic and fear began to spread across the market as investors wondered what was going on. What resulted was a bank run that pretty much went out of control and left UST gasping for breath.

In a bid to restore the peg, the LUNA Foundation Gate decided to intervene using its 40, 000 BTC reserves, but the intervention failed to achieve the desired purpose as UST continued on a free fall and dragged LUNA along.

In just a matter of a week, UST pretty much went bust, while LUNA fell from over $100 to almost zero.

Interestingly, up until last month, LUNA was a top ten coin with a market cap of over $40billion. This is the biggest collapse in crypto since Bitconnect crashed and burned.

The desperate race to save the UST had a ripple effect on the wider crypto market as selling pressure swept across the ecosystem resulting in a sustained crash in token prices.

It seems that the altcoins most affected by the crash were those that were heavily DeFi related, i.e. those with lots of exposure to UST, particular Avalanche.

Fed Interest rate hike

As soon as Federal Reserves Chairman Jerome Powell announced a rate hike, following a record rise in US inflation, the crypto market responded by shedding almost $200billion in the days that followed. The selling pressure has continued, underlining the increasing correlation between the digital currency market and the traditional financial infrastructure.

Edward Moya, the senior market analyst at Oanda, noted that crypto markets had been highly correlated to indexes such as the Nasdaq. He observed that the tech-focused index just like crypto is down. Moya added that confidence is low, and the asset has been mainly consolidating for most of this year.

In the same vein, Treasury Secretary Janet Yellen’s comment during a recent Senate Banking Committee hearing may have also contributed to the crisis. During the hearing, Janet noted that the run on UST stablecoins illustrated the potential threat to financial stability posed by unregulated cryptocurrencies. This raised fears of a possible regulatory clampdown on the cryptocurrency and worsened the selling pressure. Her comment was clearly well intended to rally support for the regulation of the crypto market, a sentiment shared by many policymakers including the EU Commission which has been pushing for a ban on large scale stablecoins.

Institutional Investors’ Crypto Interest Cooling

Last year was a great moment for crypto as many institutional investors were drawn to the asset. The likes of Tesla, MicroStrategy, and El Salvador all helped to drag crypto into the mainstream of the global financial system. Then there was the buzz created by crypto niches like NFTs, DeFi, Metaverse and so on. These ignited a lot of buying pressure for the digital assets and token prices shot up to unprecedented levels, providing a tremendous amount of value for investors.

But the excitement appeared to have been subdued so far in 2022 as investment has been on the decline.

According to CoinShares, there have been four weeks in a row of institutional crypto fund outflows, adding that the level of confidence in the market appears to have tanked.

Investors Shun Riskier Assets

The level of uncertainties in the broader market has pushed investors to abandon riskier assets like technology stocks and crypto in favour of safer havens like the dollar. This is shocking given the historic high level of current US inflation, but investors would rather stake their bet on the dollar, which is a less risky asset. According to Chris Kline, co-founder of Bitcoin IRA, some crypto investors are weighing other options and “moving their money back to the dollar, as a starting point, and then seeing what they’re going to do from there.”

Bull Bear Cycle

Despite the fright and panic that has been caused by the crash in the crypto market, wild swings are nothing new to those who have been trading digital currencies for a while. Volatility is second nature to the market and since the advent of crypto with the launch of Bitcoin, there have been four distinct bull/bear markets.

“The level of uncertainties in the broader market has pushed investors to abandon riskier assets like technology stocks and crypto in favour of safer havens like the dollar”

And even though the market has been relatively stable over the last 48hours experts believe that the plunge is far from over, they are predicting that the bear run could continue for the rest of 2022 and Bitcoin price could go as low as $20,000 before the uptrend kicks in probably in early 2023.

Joseph is a crypto writer, analysts and trader committed to providing well researched educational content that will help crypto traders and investors make informed decisions.

Joseph is a crypto writer, analysts and trader committed to providing well researched educational content that will help crypto traders and investors make informed decisions.

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Joseph Ekeng
Coinmonks

Written by Joseph Ekeng

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