What’s the hype about Crypto crashing down? Why did the Crypto Crash Happen?
The crypto market is highly erratic, with agonizing lows and heady highs, with more than 80% of the market declining between 2014 and 2018. A massacre in 2022 became one of the worst years for crypto holders, owing to the highest realized losses ever. Virtually every catalyst that led to the Crypto Crash throughout 2022 was not related to the underlying technologies but to external factors such as tight monetary policy or corruption existing among centralized entities. The crypto market has always been known to recover after a massive dip and hit all-new heights, rewarding traders and investors who enjoyed exceptional gains despite the gloomy outlook.
So, is crypto dying? Looking back, many experts claim that cryptocurrency is experiencing a dying trend, but it is a common human sentiment during any bear market. Although the crypto market appears grim in the short run, the future is hopeful and bright.
Is crypto dead? No! Here, we will justify that even though their crypto market has witnessed a crashing down, it is not likely to go anywhere anytime soon.
The decline in prices overall due to the global market condition’s influence
Various factors are fuelling the downward trajectory of cryptocurrencies, such as the decline in overall prices and consumer sentiment. These are predominantly correlated to the bleak state of global economic conditions. The mass adoption of stringent monetary policies and the rising inflation have led to a fall in consumers’ purchasing power. This has convinced many people to significantly reduce their trading and investments in crypto and other high-risk assets. Generally, any high-risk investment tends to lose appeal as soon as the market slows down and investors start seeking to invest their money in a less volatile market.
Loss of Trust
Another major cause of the cryptocurrency market crash is the loss of trust among investors. As the prices of different assets plummeted, trust began to evaporate. Crypto is a relatively new development in the digital industry and hence, is subject to other cyber attacks, product failures, and ecosystem collapses that adversely affect the entire sector.
Notable events that led to the steady fall of Crypto
A few of the significant destructive events that dampened the crypto market in 2022 have been discussed below-
The collapse of Terra Luna
The Terra Luna collapse in 2022 was caused by its link to TerraUSD or UST, which is Terra network’s algorithmic stablecoins. In May 2022, Terra Luna experienced a meltdown that affected the entire crypto market, which is already highly volatile, experiencing difficulties now and then. The Luna Crash tanked up in the Bitcoin price, leading to an estimated loss of $300 million across the crypto space. People suffered financial hardships and lost valuable life savings due to the collapse of Terra Luna. Those who exited their trades and investment positions just before the Luna Crash were the only winners of the event.
Another major event that drove the 2022 crypto market crash was the bankruptcy of the FTX crypto exchange. The damaging and swift collapse of FTX in November 2022 had significant repercussions on the international cryptocurrency community and is likely to continue for the next few years. FTX crypto exchange owes more than $3 million in digital assets to over 1 million registered users on the platform. The crypto exchange overleveraged its operations and mismanaged client funds, leading to the platform’s bankruptcy.
Increase in Interest Rates
The crypto market crash in 2022 also saw rising interest rates as the biggest culprit. Many parts of the world have faced record-high inflation since COVID-19 hit them. This led to issuing of stimulus money, which increased money supply and supply chain disruptions, driving prices of all goods and services up. To handle this, the Federal Reserve and other central banks raised the interest rates to reduce money circulation and inflationary pressures. Going by the principles of economics, this made cash holding more attractive compared to investments in risky assets. More people started taking their capital out of risky investments such as crypto, leading to a fall in crypto demand and, thereby, increasing prices.
The Terra Luna collapse had a spillover effect on Bitcoin and triggered a massive fall in its price from $40,000 to $30,000. This affected other altcoins, and the overall crypto market crashed. As Bitcoin plunged, it took all other cryptocurrencies down, leading to a decline of almost 80% to 90% in the overall crypto market.
What is Crypto Winter?
Crypto Winter refers to a long dip in crypto prices that usually extend from significant currencies such as Bitcoin and Ethereum to NFTs and other lesser-known crypto tokens. Crypto winters may be linked with a bear stock market or further economic declines. It may also occur independently of different financial needs. According to VCs (Venture Capitalists), investors have predicted the end of the current crypto winter, which is most likely between the end of 2023 and the beginning of 2024. Around 28.6% of VCs have predicted a market rebound by the end of 2023, while about 14.3% believe that crypto winter will end by Q3 2023.
The current crypto winter is necessary for an inevitable market consolidation that will weed out weaker projects reliant on inflated media hype and poor fundamentals. There are several media reports on crypto winter, but the users do not seem as worried as the price drops and bankruptcies suggest. These have occurred several times in the crypto lifecycle; each hailed the end of the virtual currency, but this has never happened.
For instance, in 2017, there was a dip in BTC prices when its value dropped by 45% from its record-high peak. It soon went to all-new highs but again lost 60% of its value in 2022. However, the currency is again on the rise as its price increased from $16,000 in January to $24,000 by the end of the year.
The cryptocurrencies that have endured on
The crypto market has been facing quite a bumpy ride as significant cryptocurrencies have lost around 40% of their value due to the 2022 market crash from the Terra Luna crash in May that brought shock waves throughout the crypto economy to the recent implosion of FTX that has experienced bankruptcies, scandals, and shocking price declines. Even with this long brutal crypto winter, a few cryptocurrencies have weathered all storms. The top cryptocurrencies that have survived the massive market crashes include –
Bitcoin is the world’s first and most valuable crypto that has easily outlasted many crypto winters. It has endured market crashes in the last 13 years and will easily overcome the current crypto winter, only to reach new heights. Many infrastructure systems and financial instruments have already been developed to support the entire Bitcoin ecosystem, urging the BTC tokens to remain in the market for as long as possible.
Bitcoin is the gold standard of the cryptocurrency industry that cannot be manipulated or controlled by human greed or politics, making the currency transparent and fair for the divided world. From the viewpoint of investments, Bitcoin can be closely linked to digital gold. It is considered a speculative commodity with a great value proposition and market capitalization with a long record of market domination. Hence, it is known as the king of cryptocurrency. BTC has created a unique network impact that has made it irreplaceable, often serving as this initial crypto contact for newcomers in the crypto industry.
Next is the smart contract king, Ethereum, a programmable blockchain that allows developers to construct codes executed when certain market conditions are met. Ethereum smart contracts are the foundation of decentralized applications (dApps) that have great potential to revolutionize real estate, finance, business, gaming, insurance, and the internet itself. While comparing the Ethereum ecosystem with its competitors, it becomes sufficiently clear that the smart contract king is head and shoulders above the competition.
Ethereum certainly has benefited from its first-mover advantage and continues to innovate and grow. Due to the recent developments, including The Merge and ETH’s future goals of supporting additional applications, Ethereum has earned the trust and confidence of investors worldwide, ensuring that it has everything required to make it through the current crypto winter.
Is it safe to invest and trade Crypto?
Before answering the question, “Is it safe to invest in crypto?” It is to understand what a crypto bear market is. Bear markets occur when the supply of any asset or commodity surpasses its demand, investor confidence declines, and the price of the underlying commodity or asset decreases. Historically, bear markets usually last anywhere between six months to 2 years.
Now coming to crypto markets, unlike traditional markets, the cryptocurrency market is highly volatile and small, which means it is more common to find a prolonged and volatile market in crypto with price drops of 80% to 85%. However, the cryptocurrency market already witnessed a massive decline by more than 75% from incredible highs in 2021, and it is only reasonable to presume that the conclusion of the crypto bear market is not very far away.
All in all, determining whether it is safe to invest in crypto heavily relies on the investment strategies and risk tolerance of the traders and investors. The crypto market will undeniably recover in the future, but its success cannot be guaranteed in the short run. Traders must use a safe approach by managing risk, staying informed, and remaining calm, especially during turbulent periods.
Where are safe places to trade crypto from?
The best cryptocurrency exchanges reviewed under CNZ have an excellent reputation, offer a wide range of crypto tokens to buy, sell, and trade, and have a beginner-friendly trading platform. Some of the safest and most reliable crypto exchanges include –
- Gemini: Gemini is a simple exchange that allows users to research the cryptocurrency market, buy and sell Bitcoin and other major cryptos, and build an investment portfolio for the future. Gemini is considered the most trusted platform that unlocks the new era of creative, personal, and financial freedom. It was launched with a security-first mentality and has built a simple yet elegant way for users to discover new realms of the trading world.
- Uphold: Uphold is the home for significant altcoins and hard-to-find cryptocurrency assets. It offers a secure trading platform with over 10 million users, supporting over 250 cryptocurrencies and allowing trades across 150 countries. The platform is regulated under FCA, FinCen, and the Bank of Lithuania and offers transparent transactions and top-notch security features.
- Crypto.com: Trusted by over 80 million users worldwide, Crypto.com is the world’s leading crypto platform with security certifications, regulatory compliances, and the most comprehensive insurance coverage. Traders can securely store, send, track, buy, and sell crypto at actual costs and trade with 250+ cryptocurrencies and 20+ fiat currencies using credit/debit card payments or bank transfers.
- Coinmama: The world’s friendliest cryptocurrency exchange, Coinmama, offers multiple payment methods, high spending limits, WOW support, instant delivery, above-par security, and fast verification. The easy-to-use crypto platform has a simple interface for novice and experienced readers.
- Coinbase: Coinbase is another secure trading destination that stores most digital assets in offline storage and supports a wide range of popular currencies.
- Binance: With Binance, traders can hold, trade, and buy more than 350 cryptocurrencies with zero fees. It also offers daily rewards that can be earned on idle tokens. Binance is committed to client protection with stringent protocols and top-notch technical measures, which include personalized access control, Secure Asset Fund for Users (SAFU), and advanced encryption.
Benefits (pros) of investing in crypto
Using crypto to trade and invest gets easy and cost-effective due to the advantages mentioned below –
- Decentralized – Cryptocurrencies are brand-new decentralized currencies that help traders combat currency monopolies and free them from control. No financial institutions, central banks, or government organizations can interfere with crypto transactions made on exchanges.
- Volatility and returns – Crypto investments generate profits due to the volatile nature of the currencies. It is a good source of portfolio diversification. Typically, crypto is highly volatile, which can enhance a trader’s portfolio if his asset allocation is heavy on digital assets.
- Asset allocation and diversification – Traders can use a practical approach by investing in crypto to achieve better risk-adjusted returns and diversify their investment portfolio. Diversification refers to spreading investments across various assets or financial markets instead of putting all the eggs in one basket. Diversification of crypto polio helps in risk mitigation, lowers volatility, and enhances liquidity for traders.
Drawbacks (cons) of investing in crypto
Let us now look at a few drawbacks of investing in crypto. Some can be quickly resolved, while others less so.
- Volatility – The volatile nature of cryptocurrencies can bring massive returns and increase losses just as quickly. Traders looking for stable returns should not invest in crypto. The market fundamentally drives speculation, and the small market size makes it vulnerable to price volatility.
- Exchanging assets – Crypto investments require conversions of fiat to crypto and crypto to fiat, which makes the entire trading process lengthy and complex for newcomers.
- Unregulated – This market’s lack of regulation of crypto exchanges is a significant drawback. Due to the lack of supervisory management, the system can implode anytime. The inherent technology may be perfect, but unless a regulatory entity adopts crypto, there will always be risks associated with crypto investments.
- Cyber hack – Crypto investments may not have risks associated with using central intermediaries, but that does not make them completely free from security risks. Cyber hacking, phishing, and other criminal activities still exist in crypto trading exchanges, where criminals try to gain control maliciously.
So, after all, is crypto dead?
The cryptocurrency ecosystem is characterized by its volatile and unpredictable nature. The statement has proved accurate, considering the different events in 2022. Policies, actions, and inactions made by investors, exchange owners, and company agencies, among others, have substantially impacted the market. Despite the harsh reality, cryptocurrency is not dying or dead. Even during such times, new innovative ideas are flourishing now and then. The massive meltdown and its resurgence prove that crypto is far from dead. Bitcoin, Ethereum, and other major cryptocurrencies are still alive, and it does not seem to go anywhere anytime soon.
Crypto investments are set to be a contentious digital asset class for various reasons, with their benefits, risks, and challenges. Cryptocurrencies continue to be promoted as a more equitable, quicker, decentralized, and more secure alternative to the already established traditional financial systems, providing users greater control over their investments.