The Current Crypto Crash Explained

0
1509

Bitcoin’s value continued to fall this weekend, from USD 38,550 on Friday, finally hitting USD 33,383 on Monday afternoon (CET). That is the lowest level in more than five months. Bitcoin rose by about 60 percent last year and reached a record level of about $69,000 in November. Since then, the currency has lost more than 40 percent of its value.

Other cryptocurrencies also fell along with bitcoin. ETH dropped well below $3,000. Crypto markets have lost about $1 trillion in value since their peak in November.

What is causing the current crash?

Many factors are at play.

Bitcoin is under pressure from the expectation that the US central bank will raise interest rates faster than expected to curb high inflation. And when interest rates rise, investors tend to move away from riskier investments such as cryptocurrencies.

The US consumer price index climbed 7% in 2021, the largest 12-month gain in 40 years, according to Labor Department data released earlier this month. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts. The Fed is expected to begin raising interest rates in March, although it is not sure yet by how much. A sharp policy adjustment from what was projected just a few months ago. The High inflation has proven more stubborn and widespread than the central bank predicted earlier.

Ukraine

Fears of a Russian attack on Ukraine saw riskier assets such as bitcoin extend their selloff. The U.S. State Department has ordered diplomats’ family members to leave Ukraine after signs that American officials could be bracing for an aggressive Russian move in the Ukranian region.

When the Soviet Union dissolved at the end of the Cold War in 1991, Ukraine became independent. And although Russia and the Ukraine are still very culturally linked, Ukraine has sought to distance itself from Russia in recent years and instead look to the West for support. The country has also expressed interest in becoming part of NATO, much to the dismay of Russia’s president Vladimir Putin. Tensions between Russia and the West have been building up, and are at the worst they have been since the Cold War. Currently there are around 100,000 Russian troops stationed at various points along its 1,200-mile border with Ukraine.

Mining

The European Securities and Markets Authority (ESMA) wants to ban bitcoin mining in the European Union. The stock market regulator fears that mining crypto coins poses a risk to achieving the Paris climate goals. Sweden’s financial regulator has already spoken out in favor of a EU ban on mining cryptocurrencies, including bitcoin.

Russia’s central bank also wants to ban the mining of cryptocurrencies in the country to ensure financial stability. The news about Russia potentially banning crypto mining is significant, especially considering Russia’s crypto trading volume last year was reportedly $5 billion, and a ban will heavily impact this. It’s difficult to say if Russia will be able to completely succeed in this. China’s attempt to ban crypto trading has not led to a complete ban so far. Today China still remains one of the most active countries for crypto.

Omicron

According to investors and analysts, the rising number of cases of the Covid Omicron variant in the U.S. had already been a major catalyst for the falling cryptocurrency prices early December. But prices remained stable the rest of December around the 43.000 dollar mark, when rising Omicron cases did not immediately lead to a strong rise in hospitalisations.

Fear

So many unknown factors and the fear surrounding the market now, has led to many traders capitulating at a loss. But this usually also represents a buying opportunity for those who have a trust in the long term value of cryptocurrencies. El Salvador, the only country in the world where bitcoin is a legal tender, has bought 410 bitcoin for $15 million on Friday. El Savador’s treasury is currently worth around $64.5 million.