The ongoing cryptocurrency market downturn continued its downward trajectory this past week, as prices of major cryptocurrencies like Bitcoin and Ethereum experienced significant declines, dragging the overall crypto market cap down substantially.
Bitcoin, which holds the ranking of largest cryptocurrency by market capitalization, plunged below the key psychological threshold of $20,000 at one point during the week. This represents a nearly 70% drop from its all-time high of around $69,000 reached in November 2021, and marks lows not seen since December 2020.
Ethereum, the second-largest cryptocurrency, also plunged to lows not witnessed since January 2021, trading below $1,000 this week. This is a massive 80% decline from its record high of $4,891 reached in November last year, showcasing just how dramatic the selloff has been across the crypto landscape in the past 8 months.
Industry analysts have attributed this latest nosedive to a confluence of factors that have weighed down risk assets like cryptocurrencies. Primary among them are the Federal Reserve’s aggressive interest rate hikes of 0.75 percentage points in recent months to combat runaway inflation in the economy. These rate hikes have reduced investor appetite for speculative, high-risk assets.
The spectacular collapse of the TerraUSD and Luna cryptocurrencies in May also appears to have shaken overall market confidence and sentiment. The way these ‘stablecoins,’ which are meant to be pegged to the US dollar, experienced a ‘death spiral’ has underscored the vulnerabilities still inherent in the crypto ecosystem.
Broader macroeconomic uncertainties, including persistently high inflation and growing fears of a recession on the horizon, have also caused investors to dump both stocks and cryptocurrencies this year. The combination of geopolitical tensions, supply chain disruptions, and dampened economic growth forecasts have fueled a rush towards safe-haven assets and away from speculative bets.
The cumulative effect of the crypto market downturn this year has been the evaporation of over $2 trillion in market value since the previous peak in November 2021. In addition to market leaders Bitcoin and Ethereum, popular alternative cryptocurrencies (altcoins) like Solana, Cardano, and Dogecoin have also experienced massive losses between 80-90% from previous highs.
This broad and extended crypto decline has already led to liquidity crunches, closures, and layoffs at several major companies in the digital asset industry. Lending platforms such as Celsius Network and Babel Finance have frozen withdrawals, leaving customers unable to access funds. Highly leveraged hedge fund Three Arrows Capital is facing liquidation after failed bets on cryptocurrencies. Major exchange Coinbase announced significant layoffs amid weak trading volumes and lowered guidance.
Market analysts remain uncertain on whether cryptocurrency prices have bottomed out yet, or if there is further downside. The prices appear to have stabilized slightly in recent weeks, but unless macroeconomic conditions improve substantially, the crypto weakness could persist through 2022 and potentially into 2023.
Bitcoin proponents continue to point to the asset’s potential long-term value, drawing comparisons to ‘digital gold,’ a scarce digital asset uncorrelated to traditional markets. But regulatory clampdowns on the sector across jurisdictions like the EU and UK show authorities have growing concerns about investor protection and systemic risks.
While major cryptocurrencies tend to move in a correlated manner, some analysts see altcoins continuing to underperform Bitcoin going forward due to weaker fundamentals. They recommend sticking mainly to established, blue-chip cryptos with stronger use cases and network effects.
It remains challenging to predict just how much further the crypto decline could extend, or when a durable recovery might ensue. Historical data shows Bitcoin has undergone several boom-and-bust cycles since its inception. Bulls are betting the current ‘crypto winter’ will eventually pass, while bears warn it could be a harsh one as macro headwinds persist.