After peaking at $69,000 last November, Bitcoin fell over 50% to briefly dip below $30,000 . The trend seems to apply to the entire cryptocurrency market. How can this general decline be explained?
Almost all of the major cryptocurrencies have been trending downward for several months, in the wake of Bitcoin (BTC) and Ethereum (ETH). The Coingecko site, which lists around 13,000 crypto assets, now estimates the total market at 1,500 billion dollars , while it was 3,000 billion at its peak. The year 2022 has already been difficult for the cryptocurrency market. Several reasons can explain this phenomenon.
A stricter global financial market policy
In 2020 and 2021, central banks injected significant liquidity to support economies hard hit by the pandemic. Cryptocurrencies and technology stocks are among the most sensitive assets to central bank policies. Thus, this liquidity has benefited the riskiest markets, including cryptocurrencies.
This year, the trend is reversed. Indeed, the central banks and in particular the FED have now raised their key rates in order to fight against inflation (in the United States, it has experienced its strongest rise in 20 years). Many investors are therefore turning to more predictable assets than cryptocurrencies and tech stocks.
The cryptocurrency market correlated to the Nasdaq index
It is true that we are seeing more and more correlations between Nasdaq companies and cryptocurrencies. Remember that the Nasdaq is a stock exchange based in the USA which brings together some of the most important companies specializing in tech.
This phenomenon is explained by the fact that more and more technology-focused companies are getting into crypto. Examples include Tesla and Elon Musk , or Meta, Mark Zuckergberg’s company.
Once decorrelated from the fluctuations of traditional asset markets and at the fringe of the global financial system, the cryptocurrency market is now much more sensitive to the Nasdaq . As the technology stocks grouped by this index have been falling since the beginning of 2022, crypto-assets follow. To make matters worse, the crypto market being smaller than that of the Nasdaq (1,500 billion against 19,276 billion), it is more volatile. A fall in the latter often results in a more substantial decline in cryptocurrencies.
There is also a global ripple effect from stock market fluctuations, particularly with the Asian markets which are suffering from the re-containment in China, and because of the armed conflict in Ukraine. At the start of the war, Bitcoin was considered a safe haven for some time . It finally fell a few days after the stock market.
A general loss of confidence
All of these lead to a loss of confidence in traditional markets, which spreads to other assets up to cryptocurrencies.
The most glaring example is undoubtedly the collapse of Terra (UST), once the market leader in the stablecoin category. By definition, it is supposed to be at par with the dollar. In fact, UST is one of the “algorithmic” stablecoins .
Instead of being directly backed by the dollar like USDC, USDT, BUSD, it is therefore based on a system that creates or burns tokens as needed. Its price finally fell from that of the dollar, creating a wind of panic among its investors who withdrew en masse from the asset . The current phenomenon clearly shows that the risk of devaluation is significant.
Ipek Ozkardeskaya, analyst of SwissQuote, underlines the failure of this stablecoin which suffered a collapse of more than 90% in value in 24 hours. A stablecoin that no longer manages to maintain a stable value against the dollar: this results in a general loss of confidence.
This anxiety-provoking climate seems to be spreading well to the whole crypto market, which now fears a downward spiral .
