The War on the Bear – Why the Crypto Market Crashed and When to Expect a Recovery

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In an unimaginable move last year, a widespread cryptocurrency market crash caused the price of Bitcoin to drop below $27,000, and another major altcoin, Luna, completely disappeared.

The collapse caused BTC/USD to break more than 55% from its all-time high in November 2021. But what does this recent collapse mean for investors? And can we expect a recovery?

source: iNews

As you can see from the chart above, the cryptocurrency market crash affected the coin in a similar way, but what caused the decline?

Basically, investor sentiment surrounding cryptocurrencies has changed in the aftermath of the economic downturn. Rising inflation rates have made investors completely wary of high-risk investments, and volatility surrounding the cryptocurrency market has become an ever-present risk to their portfolios.

Maxim Manturov, head of investment advisory at Freedom Finance Europe, pointed out that the favorable short-term market conditions caused by the COVID-19 pandemic have accelerated the bullish sentiment around Bitcoin.

As Manturov explained:

“If we compare the situation from the summer of 2021, When Bitcoin grew on inflation expectations and to some extent became a temporary digital alternative to gold One important difference from the current situation is worth highlighting. On March 15, the Fed began the process of raising rates and ending QE.

“This is the fundamental reason why all bitcoins and cryptocurrencies have grown over the past two years. And with higher interest rates, asset classes such as cryptocurrencies may be less attractive.”

In addition to the recent downturn, previous solid projects like Luna have lost 99% of their market value, dropping from their $6.75 price to just two cents. It wipes out the portfolios of countless investors.

In the case of Luna, the asset plummeted as it was linked to TerraUSD (UST), a stablecoin pegged to the dollar. As the crash occurred, the UST decoupled from the dollar and the price of Luna plummeted.

As a result, Luna’s market cap fell from $40 billion to $200 million.

While Luna’s collapse was triggered by issues that didn’t affect the broader market, it’s reasonable to suggest that the cryptocurrency’s dazzling decline recently contributed to the broader market sell-off.

Bitcoin Can’t Shake Traditional Markets

Another major factor behind the hardships of the crypto market is its inability to differentiate itself from the traditional stock market. This can be a source of frustration for crypto enthusiasts who believe that the blockchain framework behind the coin means that crypto assets should be decentralized and unaffected by global market movements.

In recent years, cryptocurrencies have been intrinsically linked to the stock market. In March 2020, when the Covid-19 pandemic disrupted global markets, Bitcoin also 57% down during the sell-off. Similarly, when stocks recovered and rallied significantly, so did Bitcoin.

Now, as the optimism surrounding the stock market recovery has dissipated, so does the prospect for cryptocurrencies. Investors are starting to shy away from cryptocurrencies as the Federal Reserve and other central banks choose to raise interest rates in the wake of inflation In the matter of preserving wealth, they decided to avoid the famously capricious ecosystem.

Bitcoin’s most recent decline came in the wake of the Dow and Nasdaq’s worst daily declines since the 2020 crash. Complicating the inflation problem was the disturbing news of Russia’s invasion of Ukraine, which led to inflation problems, supply chain problems and soaring oil prices.

This was exacerbated by the re-emergence of COVID-19 in China, triggering financial unrest in Asia. While crypto proponents believe that Bitcoin will eventually split from the stock market in the future, there is no doubt that the two are intrinsically linked today.

Is Cryptocurrency Winter Coming to Us?

The most recent decline in the cryptocurrency market has been particularly challenging for investors. There are growing suggestions that the market is entering a new ‘crypto winter’.

Crypto winters are not uncommon and typically occur between Bitcoin halvings. It occurs every four years, most recently in May 2020. The most recent crypto winter occurred between 2018 and mid-2020.

Although the name has a negative connotation, crypto winter refers to the hibernation period for many cryptocurrencies. Prices are generally stagnant, so there are few bulls to enjoy.

Nevertheless, crypto winter is not necessarily a bad thing and can actually contribute to strengthening the cryptocurrency ecosystem. For example, a prolonged downturn will help drive out weak crypto projects over time, and when the bull market returns, only the most stable, sustainable and efficient coins, blockchain and decentralized finance projects investors can buy. will remain.

Crypto winter refers to a period of time during which Bitcoin’s value struggles to generate momentum for its price to rise, but there is no reason to suggest that BTC will not be able to return to its previous highs in the future. The continued adoption of the cryptocurrency market by institutions suggests that the future of the cryptocurrency market remains bright.

Dmytro Spilka is a London-based financial writer and Solvid And prediction. His work has been published in Nasdaq, Kiplinger, VentureBeat, Financial Express and The Diplomat.

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Disclaimer: Opinions expressed in the Daily Hodl are not investment advice. Investors should do their due diligence before making high-risk investments in Bitcoin, cryptocurrencies or digital assets. Your transfers and transactions are at your own risk and you are responsible for any losses you may incur. The Daily Hodl does not recommend buying or selling cryptocurrencies or digital assets, and The Daily Hodl is not an investment advisor. Daily Hodl is involved in affiliate marketing.

Featured Image: Shutterstock/KhDuy Vo

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