The crypto bloodbath and the factors that caused it...
The crypto market has seen an absolute blood bath in the past months; it fell after making an all-time high of $3Trillion (INR 234.6 Trillion) to $769 Billion (INR 6.1 Trillion) in a short time interval of seven months. That is a massive decrease of 75%; thus, the crypto bulls are bleeding along with many venture capitals.
Talking about the relatively shorter timeframe, Bitcoin seems to have bounced from the $17K (INR 1.3Million) area, which was duly expected after months of downfall. It seems that it will test the $23,900 (INR 18.4 million)support. Since Bitcoin dominates the whole market, there is a high BTC-alt correlation; hence, altcoins follow Bitcoin's price action. But the dominance has seen a steep downfall from 48% to 43% in the last couple of weeks; this means that crypto's market cap constitutes 48% of Bitcoin, and now it's 43%. This is good news for altcoin holders since money is flowing to altcoins; speaking of altcoins, let's talk about Ethereum.
In the case of Ethereum, which a few weeks ago saw a great rally with some altcoins from $2,159( to INR3,500), after failing to break the support, it fell to $881(INR 69K). Interestingly, just like BTC, it bounced from the $880-$900(INR71k - INR 73K) support area and is expected to test the $1700(INR133K) resistance. The bounce of Ethereum was seen days after the Ropsten network upgrade since it promotes further adoption and ease of use for new developers. The ETH CC5 conference on 19th July will shed more light on the future of the network and, thus, its price.
Time after time, the cryptocurrency markets have liquidated billions of dollars worth of capital. It is natural for cryptocurrencies to fall on such a scale after giving Bitcoin a rally from $4K(INR310K) to $69K(INR 5.4 Million) in the past couple of years. But many news and events are associated with such events, making the downfall possible and predictable. While the Venture Capital funds have started to pump in cryptocurrencies, primarily DeFi and Metaverse, let us look at the significant events that made the bloodbath possible and how similar events are making a reversal possible.
Time and time again, government actions have proved to be an important factor in the mid-term price of Bitcoins since those regulations decide which market can get involved in the industry or not. Last year, China's crackdown on cryptocurrency mining tanked Bitcoin's price from $65k(INR 5.2 Million) to $29K(INR2.2 Million). The same goes for US regulators. Last year the infrastructure bills led to a sudden dump of Bitcoin in the market since the bill created difficulties for decentralized wallets.
The other factors that affected the price of Bitcoin led to the slump of Bitcoin in November of 2021 were China declaring the cryptocurrency illegal in September 2021 and rumors that India will consider banning cryptocurrencies in the winter parliament.
Regulation of countries other than the US and China also affects the market predominantly on a local level. For example, India's 30% tax and 1% TDS on crypto transactions saw a massive sell-off on local exchanges like WazirX, sparking a massive liquidity crunch on the exchange. Even the price of stablecoin like USDT fell down to around INR 64 when the pegged value should have been more than INR 75.
Even though regulation seems only to affect the cryptocurrency prices negatively, regulation is also widely welcomed by some parts of the community since it would decrease speculation and volatility in the market. Hence, regulation sometimes affects the Bitcoin prices positively, too; for example, the Bitcoin ETF news helped BTC to climb
around $3K(INR 234K) in October last year.
The economy is the one factor affecting the prices of all assets and commodities worldwide. The US is the most dominant economy, and the steps taken by US Fed affect the crypto markets substantially.
Periods of wealth accumulation lead local households to invest in alternative assets like cryptocurrencies; in this case, the US's stimulus check helped the bull run in the Covid-19 period. But the ongoing recession and high inflation rates sucked the money out of the market and prevented new money from entering the markets resulting in a steady decline since the start of this year.
A stable economy results in healthy market factors, the adoption of Bitcoin as a currency didn't help much to the failing economies of Venezuela and Afghanistan. Still, those who had invested in cryptocurrencies in those countries were most certainly less in crisis since the prices of BTC against local currencies considerably shot up, even when the market was in shambles. Hence, on a local level, just like gold, Bitcoin is a hedge against failing economies, but a planned adoption is needed for the whole market to act accordingly.
Recently the market saw signs of reversal after the US Fed chairman announced the much-awaited 70bps hike in interest rates which is half a percent. They also announced that it would reduce $9 Trillion(INR 704 Trillion)worth of portfolios and mortgages to stabilize the economy.
Major global political events have always been responsible for directly affecting the economy and hence the global markets. Kazakhstan is one such example.
Kazakhstan is the global hub of crypto mining because of its low costing electricity; after the hike in fuel prices in the country, the cabinet had to step down, and the internet was shut down. The global Bitcoin hash rate fell by 31% and resulted in a sudden decline in the price; this was not the only political event that fueled the dump.
China's energy crisis which then spread to the whole world started to intensify in October last year. China's energy crisis started when major coal companies started putting an unnecessary upper cap on production and the ever-increasing energy needs of the general populous and businesses. High energy cost leads to a higher production value of Bitcoin and higher chances that miners may not be able to make a decent profit.
The Ukraine-Russia war is probably the most prominent reason why the market is seeing multiple fakeouts at the time of reversals. A bloody war means bloody markets; the concern that the war might break out was looming from the start of this year. The Ukraine- Russia war affected the crypto markets in two major ways
The crypto equity relation
Cryptocurrencies are highly correlated to the equity market; with most of the equity market in shambles due to war, crypto followed S&P and NASDAQ discreetly. The war directly affected the commodity markets, which then triggered a domino effect, and most of the markers fell.
Global energy crisis
As mentioned above, the global energy crisis was already on the rise, and the sanctions imposed by the world on Russia, which is the biggest supplier of energy to the EU, led to an increase in the prices of natural gas and energy. The increasing oil prices and the need for oil in the west hiked inflation further.
The Terra trouble
Terra Luna was a prominent ecosystem in the crypto and blockchain world and was a major player. Terra was powered by an algorithm-based stablecoin UST that was debugged due to massive volatility and market liquidity crunch. To save the peg, the Luna Foundation Guard or LFG, which was tasked to save the ecosystem and peg during such situations, had to sell billions of dollars worth of Luna and Bitcoin to try to save the peg. While the efforts of LFG didn't amount to much, Terra dumped the crypto market.
The Elon Musk effect
Elon Musk is the richest man on the planet. He hence has considerable power and retail influence, which he used to promote a meme coin -DogeCoin, on Twitter, making it one of the craziest rallies in the market has ever seen on a scale this massive. When asked about BTC in a video conference, he stated that he owned Bitcoin and Ethereum and is bullish; the market reacted well to the news, and after an array of supportive tweets, Elon's tweets started negatively impacting the market, pushing the market down.
One of the most recent projects that went down was Celecius network, a crypto lending platform. The liquidity crunch on the network led the network to freeze the withdrawals to ward off the bank run. This did not go well with the market, and a new problem that was in the shadows for a long time came to light - an illiquid market.
In the past two years, the cryptocurrency market has seen one of the best and worst rallies in the history of digital assets. The market is volatile yet rewarding, but while entering the market, a keen knowledge of the trade is required to survive, or else we will be victims of one such crash.