Understanding the crypto market crash

The crypto crash has come, and everyone interested in the blockchain space is feeling it. Bitcoin and Ether fell to their lowest levels since July, and, as is typical for the crypto market, the wide range of altcoins tend to follow Bitcoin on the way down. Bitcoin (BTC) fell below the $34,000 mark on Monday, trading for around $33,050 following its all-time high of $69,000. Ether (ETH), the second-most-popular digital currency, fell to $2,201 on Monday, down 53% from its all-time high. Note that both of the top two cryptocurrencies reached those all-time highs as recently as November 2021. Popular altcoins, such as Solana (SOL) and Shiba Inu (SHIB), fell by 64% and 75%, respectively. The entire crypto market has so far lost a combined $1.5 trillion in market capitalisation since May 2021.

As we have previously discussed, one has to disregard hype and see the market movement in its long-term context. It's not the crypto crash but rather a crypto crash, and the crypto market has had dramatic drops before it went on to smash record highs again. But the situation right now is clear: it appears we're seeing the beginnings of a crypto winter or possibly even a bear market. So, what brought us to this?

Inflation and risk aversion

Despite the headlines, there is more going on in the markets than just crypto. Bitcoin and Co. are part of a larger trend, i.e., a broader market sell-off of technology stocks and other high-risk assets. As is often the case, geopolitical events affect global trade, and, despite a myth to the contrary, Bitcoin is not immune to politics. The main drivers of recent market anxiety appear to be tied to concerns about a possible Russian attack against Ukraine and the US Federal Reserve's upcoming meeting to tighten monetary policy and decide on raising the dollar's interest rate.

Amidst soaring inflation, the Federal Reserve is discussing the prospect of up to four interest rate hikes in 2022. Analysts have also pointed out that the drawdown of quantitative easing measures in the US may also be a factor. Either way, uncertainty reigns in the market, causing an aversion to risky assets. Crypto is closely correlated with tech stocks, and both are seen as riskier sectors. Apple, Microsoft, Tesla, the Nasdaq 100 and others have all seen a recent sustained slump. Crypto is part of the same trend but with higher volatility, making for more dramatic chart movements.

Over-regulation of cryptocurrency

Another factor in the crypto market's downturn is the apparent hostility of certain governments toward the sector, especially in countries that were important for mining and developing crypto. Last week, the Russian central bank called to ban the use and mining of cryptocurrencies. Among the reasons cited were risks to financial stability and security threats from crime or terrorism.

Then, there is China's ongoing and extensive crackdown of Bitcoin mining operations, which caused a 50% drop in Bitcoin's mining hash rate. China's strict regulation has already pushed BTC's price down and may continue to be a consideration in the short term, at least until miners find a new stable base to relocate to.

One such country was Kazakhstan, a large country with a cool, dry climate and plenty of available space that made it an attractive alternative for Chinese miners to relocate to. Unfortunately for them, this central Asian nation is not taking kindly to miners' use of electricity. The recent energy crisis and related political and social instability in Kazakhstan have also harmed the overall cryptocurrency market. Kazakhstan pointed the finger at energy-hungry cryptocurrency miners (energy consumption increased by 8%) for triggering the energy crisis.

What comes next?

A market correction like the current one hitting cryptocurrency offers a great opportunity to 'buy the dip' and pick up new assets at low prices. Bitcoin and Ether have historically bounced back from similar falls, although the value of meme coins such as Dogecoin remains untested in these cases. And although regulation is currently putting pressure on crypto, both the US Federal Reserve and the Chinese Central Bank have recently been clear about their considerations of their own digital currencies (CBDCs), which could boost digital assets in the future.

To make the right market moves in this climate, one should be equipped with the best analytical tools and most favourable trading conditions possible. StormGain provides both, combining a powerful and easy-to-understand platform with a range of assets for both speculation and risk management. New to StormGain? Sign up in just a few seconds and try our demo account to see what this all-in-one crypto platform can do for you!