2022 Crypto Market Crash Explained

2022 Crypto Market Crash Explained

Advertisements

Advertisements

An array of cascading red charts on various crypto exchanges sent investors into a frenzy. The current crypto meltdown has been a reality check for many investors looking to make a quick buck with digital currency.

Not only did crypto have some of its worst months in terms of valuation, but it also betrayed loyal crypto investors who believed these assets could offer them some economic stability.

But how did we get here? Why is Bitcoin, a digital currency that was heralded as the next big thing, hanging by a thread with an uncertain future? What will be the future for crypto investors in India and around the world?

Advertising

Let’s take a look at some of the reasons for this crypto turmoil, the damage it has caused to investors and exchanges, and things to watch out for in the coming days.

AS IS

The year 2021 has been one of the best times for crypto investors. As Bitcoin hit an all-time high of $69,000 (Rs 54.5 lakhs) in November 2021, Bitcoin’s overall market capitalization stood at nearly $3 trillion. Analysts and crypto evangelists predicted that Bitcoin would cross the $100,000 mark before the end of the year. Little did they know the worst was yet to come.

Crypto Market Graph

The total crypto market capitalization has fallen since November 2021. (Image by: CoinMarketCap)

January 2022 saw the crypto market fall below the $2 trillion mark and after that everything was down except for a slight recovery in April. At the time of writing, the world’s largest cryptocurrency Bitcoin is trading at $19,165 (Rs. 15 lakhs approx) with a 7-day decline of 8.47%. This is close to the lowest in years.

Overall, its value has fallen around 70% from its all-time high of last year in November, while other tokens like Dogecoin, Avalanche, and Solana, among others, have reached 90%. To date, the total crypto market capitalization currently stands at $860 billion.

Many pundits who have been commentating and writing in the crypto space for years consider global inflation to be one of the main architects responsible for the dire state of crypto.

The US Federal Reserve tried to fight the recession trap by raising interest rates, one of its biggest hikes in 28 years. Although the crypto market was initially undisturbed by a 0.75% rally, many market analysts believe this has led to worsening inflation rates.

“Overall, inflation has forced central bankers to reduce market liquidity by raising interest rates. This is the main reason for the fall of the crypto markets. However, while the flagship tokens only depress the price and are likely to reappear once the crisis is over, the smaller tokens are unlikely to survive the crisis.

– Ajeet Khurana, Founder, Reflexical

Even the stock market dipped into bearish territory, meaning a 20% decline from its recent peak. While the S&P 500 is down more than 21%, the Nasdaq has crashed 33% in 2022. India also faces the brunt of this constant inflation with the Nifty50 down 15% from its all-time high (18,604.45) in October 2019. It is clear that inflation has played a role in the fall of the crypto and many people are turning away from the idea of ​​investing in such volatile assets. Sentiment towards crypto as an investment has changed dramatically.

Rohas Nagpal, who is the chief architect of the hybrid finance (HYFI) blockchain, cited the following reasons for the crypto crash:

— Extreme overvaluation of most cryptocurrency projects.
–The gloom caused by the Russian-Ukrainian conflict and COVID-related lockdowns.
–Governments are getting tougher on crypto.

Bitcoin Regulation

Many governments around the world are seeking to regularize crypto.

One of the reasons many governments are wary of crypto is its decentralized nature and untrackable transaction history. Seeing the potential risks involved, the Indian government announced in the last budget session a flat tax of 30% on the transfer of digital assets, including NFTs. Additionally, in April this year, the National Payments Corporation of India (NPCI) disabled the UPI transfer feature for crypto wallets, making it even more difficult for people to transfer money from their bank accounts to their crypto wallets.

Not only that, but a recent announcement by the Central Board of Direct Taxes (CBDT) to levy a 1% withholding tax (TDS) on all crypto transactions has not gone down well with the crypto community.

While many crypto investors see these regulations as attempts to deter people from investing in crypto, others fear that a blanket ban like in China or Egypt may be imposed in the future.

It’s just not India, many other countries have rolled out strict regulations on cryptocurrency transfers due to their strong ties to the dark web and other malicious activities on the internet. Just recently, the EU said new legislation has been agreed where transfers of crypto assets will be traced and identified to prevent money laundering, terrorist financing and other crimes.

There are two sides to this. On the one hand, with crypto regulation, investors can be protected from unprecedented losses incurred due to the crypto market crash and bad actors can be tracked down, while on the other hand, crypto- Currencies being regulated under the watchful eyes of a centralized body defeats the purpose of its existence and people are not warming to the idea of ​​crypto as a viable asset class.

To add to this, the recent crash of one of the biggest crypto projects, TerraUSD, and Luna tokens, has also added to the miseries of the crypto market.

THOSE WHO HAVE CAPITULATED

The crypto crash has had its fair share of casualties. The collapse led one of the biggest crypto hedge funds, Three Arrows Capital (3AC) to enter liquidation after failing to make payments on a loan of 15,250 Bitcoin (Rs 2,557 crores approx) and USDC from worth $350 million (Rs, approx. 2,761 crore). The $10 billion crypto hedge fund was an investor in Terra and had made leveraged bets on many tokens that are currently struggling, including Bitcoin, Ether, and Solana. Other big names like Voyager and BlockFi also filed for bankruptcy only to be reduced later with funding from billionaire crypto boss Sam Bankman-Fried.

Many big names in the crypto exchange space have had no choice but to lay off some of their workforce. One of the biggest crypto exchanges, Crypto.com, cut a total of 400 jobs on June 16, while Coinbase announced that it had laid off 18% of its total workforce; it’s 1,100 employees.

Crypto Unemployment

Major crypto exchanges have laid off employees due to the crisis.

While Indian crypto exchanges haven’t taken such drastic measures to ward off the current crypto calamity, I don’t think it will be easy for them to stay afloat if the market doesn’t improve.

A Coin Telegraph report said that more than 80,000 Bitcoin investors have had their millionaire status revoked with only 26,284 addresses said to contain holdings valued at over $1 million. That’s a 75% drop in the last 9 months. Additionally, the number of Bitcoin Whales (addresses containing over $10 million in Bitcoin value) dropped dramatically from 10,587 addresses to just 4,342.

Since many crypto investors now understand that betting big on crypto isn’t the smartest investment decision, they should always look to invest whatever money they would be willing to part with. Investing your savings in crypto is never a wise decision.

For Indian investors, this is a time to assess their investment horizons, risk appetite and build their portfolios accordingly. Above all: Find out about the projects before investing; understand use cases and potential and refrain from being swayed by peer pressure

– Parth Chaturvedi, Head of Crypto Ecosystem, CoinSwitch

WHAT’S IN STORE?

According to a study by crypto market analysis firm Glassnode, despite the negative sentiment and declining net worth of former Bitcoin millionaires, more than 13,000 new “wholecoiners” – a wallet containing one or more Bitcoin tokens – have been added to the market. Another encouraging sign for Bitcoin followers is that over 2,50,000 addresses have added 0.1 or more Bitcoin tokens to their holdings in the last 20 days.

A Capgemini report from 2022 also indicates that high net worth individuals (HNWIs) have embraced crypto along with other digital assets with over 71% of the nearly 3,000 people investing in digital assets.

This indicates that cryptocurrency adoption is still at its peak, with many investors not giving in to current market pressure.

On the contrary, Rohas Nagpal believes that many crypto exchanges will go bankrupt during this phase and may not recover. Only projects with strong revenue models and good use cases can expect to rise from the ashes of the “Great Crypto Crash of 2022”.

CoinSwitch analysts also believe that the involvement of TDS after July will set the course for the rest of the year as exchanges stabilize at lower liquidity levels and get a better sense of the INR premium versus offshore markets. . Not to mention they also have faith in Ethereum “merger” or transitioning to a “proof-of-stake” consensus model – possibly in September-October, which is being touted as a huge positive catalyst for the whole. of the ecosystem.

Historically, there hasn’t been a continuous 4-year holding period where Bitcoin returns have been negative and that’s something investors can look forward to in the long run. Since Bitcoin is the lord of all other tokens, we can expect the market scenario to improve once Bitcoin returns to greener pastures. However, the big question is, will it be soon?

Leave a Comment

Your email address will not be published.