The Crypto Collapse

puneet

Cryptocurrency is having one of its worst weeks in recent years. The markets crashed over 70% in just 8 months, with investors losing over $2 trillion. Bitcoin plunged to nearly $21,000 on June 15th, 2022, marking an 18-month low for the world's largest cryptocurrency. Ethereum, the second most valuable cryptocurrency, lost almost a third of its value in the same period.

When the market is confident and liquidity is abundant, people are more likely to invest in risky assets, where they can make or lose money overnight. Cryptocurrencies certainly fit this description. During the time of the pandemic, interest rates were low, liquidity was abundant, and a stimulus check enticed investors to invest in risky assets.

So, the concern is, why is the crypto market facing a bear run? The answer is the soaring inflation, the hike in interest rates, the increase in the cost of living and recession knocking on the door. In addition to the crypto market, several risky assets are experiencing a liquidity crisis.

A major contributor to the deterioration is crypto traders' heavy reliance on borrowing to increase the upper limits of their market bets. A falling market forces traders to ask for more funds to sustain their positions.

For a few hours on Monday, Binance, the world's largest cryptocurrency exchange, paused withdrawals. Meanwhile, Celsius, which had almost $12 billion under its management as of May, halted withdrawals, swaps, and transfers between accounts due to extreme market volatility. "Celsius’s move is a classic example of lacking liquid assets,” Kavita Gupta said on Yahoo Finance Live. Celsius is a dominant player in the decentralized finance space, which strives to copy traditional financial products like loans without the need for intermediaries. The company has several popular assets in the Defi world, including staked Ether, a version of the Ether cryptocurrency that offers rewards for deposits.

The announcement made by Coinbase, however, came as yet another shock. In a statement, the platform said it would lay off 18% of its workforce.

According to a report by the Wall Street Journal, Three Arrows Capital, a crypto hedge fund and active backer of Web3 startups, is considering a bailout.

The price of Bitcoin is rooted in its demand and supply factors. Due to the adverse economic conditions, investors are sceptical about the crypto market, resulting in sluggish sales and the downfall of Bitcoin.

That bubble is showing cracks now, especially after the collapse of the Defi ecosystem.

As the "crypto winter" eats away the income of "miners," electricity consumption by the largest cryptocurrency networks has decreased by up to 50%.

According to estimates from crypto analyst Digiconomist, Bitcoin's electricity consumption has fallen by a third from its peak on June 11 to 131 terawatt-hours a year, The Guardian reported.

All stakeholders are adjusting to the new reality, from founders to venture capitalists to retail investors. A cascading effect occurred with the collapse of Terra's native cryptocurrency, Luna, which devoured more than $40 billion from the crypto market.

"There is a snowball effect. Whenever the bitcoin goes down in price, more people are obliged to sell bitcoin, exaggerating the sales", Yves Choueifaty, chief investment officer at Tobam Asset Management, said.

At the height of the 2008 financial crisis, Bitcoin was created as a financial alternative, frequently acclaimed as immune from the effects of inflation and politically skewed monetary policy. Executives are now concluding that the crypto industry can undergo booms and busts similar to other markets.

Many executives question whether crypto has already experienced its own "Lehman" moment, with Celsius being the biggest faller. They hope the sentiment is shifting towards action to stabilize the market.

More interestingly, what will happen if governments begin to regulate bitcoin and digital currencies like it seriously? China and India are the only major economies that have so far taken this step. Most policymakers have instead shifted the discussion to talking about central bank-issued digital currencies (CBDCs).

Irrespective of what happens next, it's clear that Bitcoin conversations and perspectives are evolving with inflation. Investors are exploring crypto as a store of value, international banks and governments are using it for trading, or citizens are trying to protect their purchasing power, and the adoption of crypto has reached a new level.

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My research focuses on U.S. and global events. My writing experience includes geopolitics, current events, and technology.

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