Cryptocurrencies are volatile, we get that, but how do you navigate this crazy crypto market, especially if you’re a new investor? After a mini-recovery only a day ago the crypto market is down.
Here are some reasons why
- Price moves can be impacted by macroeconomic conditions and we’re seeing that today as crypto prices across the board fell off a cliff in yet another flash crash.
- Rising interest rates and other government measures may lower investor confidence in risky alternative assets.
- Some people may instead opt for safer investments, such as savings accounts, which offer predictable returns.
- Meanwhile, falling prices may force investors to free up their cash. These factors can compound the pressure on the market and cause prices to crash.
One reason for the current crash is a growing fear of inflation, and the rise in interest rates has dampened investors’ appetite for risky assets. This fear has driven investors to dump crypto and move their money to safer and more predictable assets, such as bonds.
However, this fear is not exclusive to Bitcoin; other cryptocurrencies have experienced price drops as well.
This week Bitcoin has sunk below $20,000. The market cap of cryptocurrencies has declined about 10% since the start of the year and is predicted to fall further as Bitcoin struggles to stay above the $20K mark. On top of that, the news that the Federal Reserve intends to hike interest rates is likely to be a factor which may keep Bitcoin down, along with the rest of the market.
The reason Ether is down lately is due to a number of factors.
- Investors are selling up because of heightened inflation fears and increased interest rates. According to recent data from the US Bureau of Labor Statistics, the rate of inflation rose to the highest level since December 1981. The news has caused investors to be concerned that a further surge in inflation could trigger even more aggressive actions from the Federal Reserve.
- The market is experiencing a bearish trend in recent weeks, and the price of ETH was recently down below a key oversold level for the first time since November 2018.
- The cryptocurrency markets are being affected by macroeconomic conditions. The latest CPI figure was released and showed that the cost of living in the United States jumped 1% in May, pushing the inflation rate to an all-time high of 8.6%. A 30 percent drop in the crypto market today is nothing compared to previous slumps in the industry.
- The Merge. As Ethereum prepares to move from Proof or Work to Proof of Stake many speculators are selling now as they believe the Merge is a classic “buy the rumor, sell the news” scenario.
The Solana blockchain has had six major outages since the start of the year. This is because it is plagued by bots known as Candy Machine. These bots, which are designed to mine NFTs, are causing the network to become overcrowded and cause network congestion.
The underlying problem of scaling is not confined to Solana, but affects many blockchains. Solana, which is a Layer-1 competitor of Ethereum, recently suffered a massive outage of its network. At one point, the network was undergoing four million transactions per second, and it received 100 gigabits of data.
The development of Solana has been spearheaded by the Solana Foundation, a Swiss-based non-profit organization. In January of this year, the foundation started hosting a series of hacker events to foster its developer ecosystem. These events, dubbed “The Hacker House,” are set to take place in several cities going forward. The goal of the foundation is to build a blockchain platform that is capable of massive scalability, and more important perhaps, security.
While Solana is part of a lot of investment portfolios based on the speed of the blockchain and the future adoption, the outages and hacks are a major concern.This has a cumulative effect in eroding confidence in the overall crypto market.
Terra is tied to the Luna cryptocurrency, which collapsed along with the stablecoin known as UST. The collapse has wiped out billions of dollars in crypto wealth. It raises questions about stablecoins in general, and has caught the attention of politicians and regulators. The company that developed UST is building a new blockchain without the stablecoin, so it’s unclear what will happen next. But the damage appears to have already been done.
Investors had high hopes for TerraUSD, believing it would become the new blue chip of cryptocurrency. However, they experienced devastating losses and are wondering if TerraUSD was simply a get rich quick scheme for founder Do Kwon.
One Massachusetts surgeon lost his family’s nest egg, and a young Ukrainian man nearly committed suicide after losing 90% of his savings. Other investors have lost their dreams of starting new businesses or quitting their day jobs to invest in cryptocurrencies.
Celsius, was a peer-to-peer lending network that is now in bankruptcy, accused of running a Ponzi scheme. In December, the company suspended transfers and withdrawals due to the volatile market conditions. This has caused a further drop in prices. Celsius’s plight is typical of many decentralized finance (DeFi) lending platforms.
Customers deposited cryptocurrencies on Celsius in order to then lend them out. The firm then splits the interest received from these loans. It offers interest rates of up to 18.6% APY. However, its activity has been suspended by the regulators because of “extreme market conditions.”
Since November, when Bitcoin hit an all-time high above $60K, cryptocurrency prices have been falling. China has also banned the use of cryptocurrencies, further depressing prices.
While Celsius’s bankruptcy isn’t surprising, its failure is having a dramatic impact on the crypto industry. The company owes customers around $4.7 billion and has a $1.2 billion hole in its balance sheet.
Leverage is the drug of choice in the crypto industry, and losing liquidity makes it harder to keep the party going.
The Celsius crash was the third major bankruptcy in the crypto ecosystem in a period of two weeks joining Terra Luna and Three Arrows Capital. Analysts have called it “crypto’s Lehman Brothers moment.” Lehman Brothers’ failure in 2008 foretold the current mortgage debt crisis.
Analysts look at tokenomics, white papers, on-chain statistics, and GitHub development activity when examining a crypto asset’s core parameters. These crypto asset qualities tell investors about a project’s security, utilization, and growth.
Long-term investors can leverage price drops to enhance holdings. Price is crucial for traders and speculators, but it can hurt long-term investors.
Those who believe in the underlying technology of blue chip projects like Bitcoin and Ethereum and real-world use cases of cryptos like Avalanche and Solana must recognize that recent volatility is normal in the crypto field and should continue to hold as the crypto economy matures.
I write about blockchain, crypto, NFTs and other disruptive technologies and innovations.