It’s been a rough day for the cryptocurrency market. Over $200 billion was wiped off the market overnight, a drop that’s left many wondering what caused the collapse. The sell-off was blamed on a variety of factors, including a rise in interest rates, financial meltdowns, and stablecoins. Here are some of the key factors that contributed to the plunge. Hopefully, this article will give you some insight into the latest happenings in the cryptocurrency market.
$200 billion wiped off cryptocurrency market
In less than 24 hours, nearly $200 billion in value was wiped off the cryptocurrency market. The sell-off, driven by the collapse of the stablecoin TerraUSD, hit major cryptocurrencies hard. Bitcoin, Ethereum, and other coins and tokens all fell in value by around 10%. The price of Bitcoin has fallen to its lowest level since December 2020.
The sell-off in crypto markets caused many to flee from the crypto space. Bitcoin is down more than 20% from its peak level, and Ethereum fell as much as 16%. The fall in value is likely due to rampant inflation, and a decline in sentiment in the crypto markets. Meanwhile, the U.S. Federal Reserve is expected to raise interest rates this week, putting even more pressure on cryptocurrencies.
Investors reacted with trepidation to the news that the US Federal Reserve will hike interest rates. This move will make investors less likely to buy risky assets. The Fed is considering a 75-basis-point rate hike, which would be a larger increase than the previous 50 basis points. Rising rates also make future earnings of growth assets less attractive. In the recent crypto market crash, smaller cryptocurrencies are being hit the hardest.
Stablecoins blamed for sell-off
A recent sell-off in cryptocurrency prices has been blamed on stablecoins, particularly the first-generation Tether (USDT). Investors and venture capital firms were hit hard by the tumble, but two other boundary-pushing stablecoins have also seen massive falls in market caps.
As cryptocurrency markets continue to struggle, regulators are taking notice of these issues. The US Securities and Exchange Commission has asked for new powers to regulate cryptocurrency. The US Treasury Secretary also met with the President’s Working Group on Financial Markets to discuss the issue. But despite the regulatory skepticism, the crypto community is resigned to the reality of pending regulation.
While stablecoins are supposedly more secure than traditional financial instruments, they’re still riskier. Professor Hilary Allen of the Washington College of Law says that the current situation makes stablecoins vulnerable to market fluctuations. The biggest stablecoin is Tether, which has a market cap of $130 billion and has issued at least 48 billion coins this year.
Rise in interest rates
The rise in interest rates has wiped off a big chunk of the cryptocurrency market. The US Federal Reserve has made clear that it is moving away from ultra-dovish policy and towards raising interest rates. They have also reduced the size of their balance sheet and have stopped buying huge quantities of US government bonds and mortgage-backed securities. These actions have a direct impact on the cryptocurrency market.
The rising interest rates have mostly hit risky assets like cryptocurrency. Many weak-handed investors have already exited their positions, and the Fed’s aggressive monetary policy has only exacerbated this trend. Bitcoin has dropped more than seventy percent since June. It has since rebounded, but it is still about 60% below its high.
The biggest losses came from cryptos pegged to the US dollar. Many investors believed that Terra/Luna was a safe bet because it was pegged to the US dollar, but a fall in its value led to a massive sell-off. As a result, Celsius Network halted withdrawals to 1.7 million of its customers. Coinbase fired 18 percent of its workforce. Three Arrows Capital also liquidated their crypto holdings.
Financial meltdowns
A massive crypto sell-off this week has wiped over $200 billion from the market. The plunge was triggered by the collapse of the TerraUSD stablecoin and hit most of the major tokens hard. Bitcoin and Ethereum both fell by about 10% over the course of the day. Crypto-related stocks also plummeted in Asia. In particular, BC Technology Group Ltd. and Monex Group Inc. closed their trading sessions Friday almost 10% lower than they did Wednesday.
The market has seen wild swings over the past few days as central banks tighten monetary policy in an attempt to curb inflation. While the crypto market has remained relatively stable overall, the price volatility continues to plague digital tokens. On Thursday, S&P 500 futures declined 0.8%, tracking losses in the MSCI Asia Pacific Index. This is not unfamiliar territory for investors in the crypto space.
A major reason for this volatility is the uncertainty surrounding crypto assets. Many of the applications for these assets are novel, and the value of them may never be fully realized as a medium of exchange.