Over the last couple of days, the crypto market crashed hard. This took a heavy toll on cryptos, as the crypto market cap lost more than $1 trillion since the start of 2022. Why do such events occur? It is important to understand that no market in the world increases in value without any adjustment lower. This is known in the stock market as “cycles”, where bull markets are followed by bear markets. After 2 years of bull market, the crypto market reached the bear in 2022. However, there are many factors that contribute to this decline. Why is the crypto market crashing? Let’s find out.
What is a Crypto Market crash?
A crash usually occurs when an asset falls by more than 5% in value. Since the cryptocurrency market is known to be volatile, a crypto crash is usually defined when the average decrease in the entire cryptocurrency market capitalization exceeds 10%.
However, cryptocurrency prices can change within a single day a lot. That’s why crypto crashes become way harsher than the typical equity market crash, where an aggregate decrease of 3% can cause a big stir in the market.
Why is the Crypto Market Crashing?
In order to understand why the current dynamics of the market are causing prices to fall down, we need to first analyze the total market cap of cryptocurrencies over the last 3 years. Since 2020, crypto prices started their uptrend. This happened with the rise of many new crypto projects. This is always a good thing, inviting new projects and companies to dip their toes into the crypto world. However, not all launches succeed. This was not properly reflected in the market.
To add to this mess, Elon Musk came into the crypto scene and threw gasoline into the burning crypto community. Everything became hyped, and cryptos became highly overbought. In figure 1 below, we can see how the crypto market as a whole increased in valuations. Now let’s dig deeper through the fundamentals and assess why the crypto market is crashing.
#1 The “Hype” is fading away
Yes, hype sometimes can inflate things, but sooner rather than later deflates them. Cryptocurrencies were considered a serious alternative to traditional investment vehicles. However, when Elon Musk started to tweet memes about them, it turned them into a childish and cool currency. With Elon halting crypto-related tweets followed by a bear market, more and more people are “getting out” of the crypto community as they got in on a bad note. Heck, most newcomers got interested in cryptos because of Elon and Dogecoin.
#2 The Crypto market was heavily overbought
When you overbuy something, you will stop buying…very obvious indeed, but think about it for a second. A market crash happens when there are more sellers than buyers. This reason might not be too big, but it definitely played a big role in how the grand schemes of things played out.
#3 Uncertainty in the Equity Market
By now, you should have noticed that the crypto market is highly correlated with the stock market, specifically tech stocks. If we look at the S&P 500 chart, we can notice how prices dipped by 6% in the past month. For the equity market, this is a big deal.
#4 Constant negative media exposure
Since the beginning of the year, we have seen articles and videos from the mainstream media bashing cryptos. The most famous and latest one would be Warren Buffet saying he’d never buy cryptocurrencies and how their value should drop to 0.
#5 Interest rate hike
The US Federal Reserve increased the interest rate to cool off the inflation, which was caused by them in the first place. See, when the COVID-19 crisis happened, the US started to print money and distribute it to people. This led to a massive increase in the USD supply in global markets. People started buying everything, including cryptos (which also helped their prices rise since 2020).
However, this technique is risky over the long term, as it creates inflation, which is the general rise in the prices of goods and services. To fight that, the US Fed reserve increases the interest rates, making it more expensive for people to get loans or for businesses to get their much-needed financing for their operations. This in turn hurts the economy as investors become wary