Why is Crypto Crashing?
There are a number of reasons for the current crypto market’s decline. Some of these factors are rising interest rates, China’s aggressive crypto market, fears of a global recession, and the lack of self-governance. But there are also more complex factors, which can affect the price of cryptocurrencies.
Rising interest rates
The cryptocurrency market crashed this week due to a variety of factors. These factors include rising inflation, interest rates, and geopolitical instability resulting from the ongoing war in Ukraine. While none of these factors can be entirely blamed for the crash, they have all contributed to the recent downward trajectory of the crypto market.
The biggest culprit may be rising interest rates. The Federal Reserve plans to hike interest rates at each meeting this year, with a hike of 50 to 75 basis points expected at their next meeting. And the Bank of Canada has similar plans. This may mean that crypto is unlikely to see large gains in the rest of the year. As a result, investors should prepare for volatility in the months ahead.
China’s aggressive crypto market
China has become a notoriously hostile market for crypto players, and regulators have made the situation worse by cracking down aggressively on the industry. The country is home to a whopping 8 percent of the world’s computing power and has banned the establishment of several cryptocurrency exchanges. The aggressive crackdown has also caused bitcoin’s values to crash in the country. The government’s aggressive approach has prompted exchanges to move their operations to other countries.
The latest action taken by China’s regulators is a blanket ban on cryptocurrency transactions and mining. The ban affects all major coins and crypto stocks. The Chinese central bank, in conjunction with nine state bodies and the supreme court, aims to crack down on illegal activity related to cryptocurrencies.
Fears of a global recession
The recent crypto crash is due in part to fear of a global recession. While low interest rates and government stimulus have helped to fuel cryptocurrency prices, fears about a recession have caused the market to plummet. Experts are divided over the likelihood of a recession. Goldman Sachs says there is a one in three chance of a recession over the next year, while Nomura and Bank of America both believe a recession could start this year. The Federal Reserve has also raised its key lending rate by 75 basis points and inflation has reached a 40-year high.
The rise of the crypto industry is directly tied to the copious amounts of monetary fertilizer poured into financial markets by central banks. Economists argue about how long this inflation will last, but one thing is for sure – central banks are under pressure to keep inflation under control. This means that markets with the most luxuriant growth will be hit the hardest.
Lack of self-governance
Cryptocurrency has become a geopolitical tool in the past few years. Historically, dictators have been drawn to this new currency for their own political purposes. However, the recent crash of the value of cryptocurrencies has led to a new set of political problems. A new political system is clashing with the old economic system.
There are several reasons why the market has crashed. China’s recent ban on crypto services is one of them. Although the country didn’t outlaw individual ownership, they banned exchanges and other services. In addition, the Federal Reserve reduced the liquidity for cryptocurrencies in 2021. As a result, many cryptos have been on a significant decline for much of 2022. The largest crypto exchange, Coinbase, has announced layoffs. This could compound the pressure on the market and force investors to free up cash.
Fears of centralized stablecoins
Stablecoins are digital currencies that are backed by assets. Like other cryptocurrencies, stablecoins do not have full transparency and can be volatile, but they promise to be stable holdings. Stablecoins are primarily used for payments, and their names reflect that. Stablecoins require a reserve of assets that are kept in the form of collateral. While many stablecoins claim this backing, some have no reserves at all.
Tether, one of the most popular stablecoins, is facing increasing scrutiny, including CFTC charges filed against it. The CFTC said this was the first time they had filed charges against a stablecoin. The SEC and Congress have also expressed concern about the risk of these coins.