If you are one of those who invested in cryptocurrency over the past few years, you may be freaking out right now with what’s happening in the global cryptocurrency market due to the crypto crash. The price swings experienced may already be an expected scenario for long-term investors, but with the big dip happening, is it something to be overly worried about?
It’s inevitable to be worrisome in this kind of situation. Even the most prominent cryptocurrency, Bitcoin, has experienced its lowest of almost 70% loss since the last quarter of 2020. With this, there’s an overwhelming sentiment among the investors and traders on when cryptocurrency will bounce back or if it will still be able to recoup.
Since there’s a lot of speculation about what caused the crypto crash, let’s get into the details about this historical event in the crypto world. Here are some of the reasons why the crypto crash started:
- Terra USD (UST) and Terra (Luna) Crash
Stablecoin is often linked to secure investments because of its immunity to crypto volatility, with its stable exchange rate valued like that of a US dollar, Euro dollar, or gold. But what happened to Terra? As an algorithmic stablecoin, it aims to at least maintain a value of $1 through its sister token, Luna, and this is where the Luna-Terra fiasco happened.
There were assumptions that the reason for the Luna crash was because of the pricing structure of TerraUSD, wherein when you have a $1 UST, it always has a value of $1. You’ll get an instant profit when the value of UST is more than $1 because you can trade $1 worth of Luna for a UST. On the other hand, when the value of TerraUST is less than $1, you can trade Luna at a price of less than $1. With this, when the cost of TerraUST fell, the supply of Luna tokens increased, which also crashed its price, losing its 99.9% value.
The workaround is to sell their Bitcoin reserves to at least bounce back its value to $1, but the company behind TerraUSD, Terraform Labs, failed to do it. In a span of days, over $400 billion in market capitalization was wiped out. The TerraUSD crash led to the Luna crash, and the whole crypto market was dragged down.
- Cryptocurrency Regulation
The crypto market poses greater risk and certainty than the equity market because it is not regulated, unlike the equity market. Investors tend to be more confident investing in stocks because they are protected from fraud and other breaches. The crypto regulation may end endless speculations about cryptocurrency’s credibility. But why it hasn’t been fully regulated yet?
The Chinese government ceased trading activities and banned crowdfunding for crypto projects in September 2017, dropping Bitcoin’s value in just a few days. With this, there are a lot of doubts if this will improve the crypto transactions or just make the situation worse. The news about the cryptocurrency regulation has already led to a massive sell-off because, for investors, any changes in its operation may have an impact on the future of the crypto market.
- Crypto Security Breaches
Another factor that contributed to the crypto crash was the blockchain security breaches. These security breaches experienced in the crypto world greatly affect the trading and investing activities that influence cryptocurrency prices. One of the common security breaches is the crypto exchange hack. When investors lose their funds due to hacking, it is for sure that selling off their assets will be the top priority to protect what they still have and just shift to a more stable fiat currency.
For some cryptocurrencies, it’s important that investors would not feel fear, uncertainty, and doubt (FUD). Cryptocurrencies that do not hold value on their own depend on the investor’s sentiments. If there’s negative news about them, investors may resort to selling their assets to prevent a potential loss.
- Its Correlation with the Stock Market
Ideally, cryptocurrency must be an uncorrelated asset or an independent entity from the rest of other markets. However, this is not the case now. Cryptocurrency has adopted how traditional markets or the stock market evolved over the past few years. Experts say that cryptocurrency’s correlation with the stock market is one of the factors why its performance is affected.
These two entities greatly differ in terms of their value. Stock prices depend on the growth of the company’s assets, while cryptocurrency depends on traders and investors who will buy it. Cryptocurrency does not have an intrinsic value or is not backed by cash flow or assets, unlike stocks, but since traders and investors treat them the same way, their prices have the same trend.
The trader’s and investor’s decisions regarding their crypto activity depend on the situation in the equity market. Since inflation causes the value of the stock market to drop nowadays, the demand for cryptocurrency was also affected. If cryptocurrency only stays as an uncorrelated asset, there’s a chance that its prices won’t be affected by the fluctuations of prices in the equity market.
What’s There After the Crypto Crash?
With the devastating crash in the crypto world, there seems to be a silver lining waiting for traders, investors, and those who are still thinking of investing. The sought-after altcoin and second largest cryptocurrency next to Bitcoin, Ethereum, plans to do a major software upgrade in September 2022 known as the Ethereum Merge. The merge of Ethereum and the Beacon Chain aims for a secure altcoin network, reduced centralization risk, and more energy efficiency.
Is it a sign to shift to Decentralized Exchange? Some users still choose not to opt for Decentralized Exchange because of its downsides, such as low liquidity and security issues. To curb this, the Celadon Project was born with its native token, CELA. The Celadon Coin provides almost the same services as other altcoins but promises higher returns at a more secure platform. Moreover, the CELA price prediction by the end of the last quarter of 2022 is between $0.00050 to $0.001.