Crypto crash - What's causing the downtrend?
- 5 minute read
Bitcoin and other major cryptocurrencies, such as Ethereum, XRP and Solana, have fallen in value by tens of billions of euros in recent days. Such a drop in value of cryptocurrencies is not uncommon in this market. The crypto market is very sensitive to price fluctuations and prices rise and fall quickly and on a regular basis. Yet, due to macro-factors, the crash of the past few days is one to watch more closely. In this article, we explain why.
Table of Contents
Why is crypto crashing?
The crypto market is currently crashing due to various macro-economic and - geopolitical reasons.
Interest rate rises and inflation in the United States
Firstly, many investors are concerned about rising inflation and interest rate increases in the United States. The US Federal Reserve is in fact very concerned about rising inflation in the country. Fed Governor Lael Brainard said last week that it was of "great importance" that the Fed raise interest rates faster and reduce its balance sheet.
The announced interest rate rises have alarmed US stock market investors. Over the past decade, these investors have enjoyed many benefits, which are now disappearing at a rapid pace. This has led to the US Nasdaq 100 recording its biggest two-day loss in almost a month. With Bitcoin often moving with the Nasdaq 100, Bitcoin too suffered a severe correction.
War between Ukraine and Russia
The announcement of interest rate rises due to rising inflation is partly due to the war between Ukraine and Russia. This war accelerated worldwide inflation, as certain raw materials were no longer or hardly accessible. This is driving up the price of various raw materials enormously.
In addition, traditional financial markets and companies are being put under pressure by this war. Many countries and companies have stopped or reduced their business with Russia and/or Russian companies. For some companies, this means missing out on profits or even making a loss. In addition, raw materials have to be purchased at alternative locations, which usually results in a higher purchase price.
Poverty and food shortages
The snowball effect of the Russian invasion is also expected to lead to extreme poverty by 2022. Oxfam Novib states that at least 860 million people will have to live in extreme poverty this year, which means on less than 1.75 euros a day.
This increasing poverty is in part due to the corona pandemic, the growing global economic inequality and the rising food and energy prices due to the war in Ukraine. Oxfam Novib advocates that the economically strong countries compensate the poorest countries. But there is increasing uncertainty in Western countries, causing traditional financial markets to react uncertainly to the decision to compensate poorer countries.
Macro factors have major impact on crypto crash
The global uncertainty that now prevails on various levels is reflected on the crypto market. The crypto crash of the past days has caused the total market capitalisation of the crypto market to shrink to around 1.7 trillion euros. This is approximately 800 billion euros less than last November (-30% fall), when the entire crypto market was worth 2.5 trillion euros.
In the past week, Bitcoin crashed by -15%, Ethereum -15%, XRP -15%, Cardano -22% and Solana 24%. Of course, the chance that these percentages are different at the time of reading is quite high, but it does indicate that cryptocurrencies are having a rough time at the moment. According to CoinMarketCap, only 4 of the 100 cryptocurrencies in the top 100 turned green last week. It is fair to say that macro factors are having a significant impact on the cryptocurrency market price.
Crypto prices may be affected by traditional financial markets
As discussed earlier, the crypto market is going through corrections, mainly due to macro factors. This could possibly continue in the near future, as multiple economic analysts predict that several financial markets, such as the Nasdaq 100, will crash. Indeed, the Nasdaq 100 is already showing cracks and with the increasing uncertainty, vigilance is essential.
Investing during a crypto crash
A crypto crash leads to (great) uncertainty for some investors. Which is not surprising, because you never know for sure if the market will recover from such a crash. Nevertheless, there are also plenty of people who make money during a crypto crash. Therefore, we would like to highlight the positive aspects of a crypto crash and tell you which investment strategies might help during a crypto crash.
- Buy the dip: Cryptocurrencies are volatile. They can rise and fall sharply in value. After a crypto crash, most cryptocurrencies, like Bitcoin or Ethereum, tend to recover from this. Especially when you look at the long term. So if you buy during the worst moments of a crypto crash, you have done good business when the market has recovered.
- Dollar Cost Average (DCA): DCA is a strategy where you invest a certain amount of money at regular intervals, regardless of the price of the cryptocurrency. This strategy gives you a certain peace of mind because it doesn't matter if the cryptocurrency market is doing very well or poorly, because you still buy at set times.
Please note; investing in cryptocurrencies is very risky. When investing in cryptocurrencies it is always important to do your own research. Above mentioned strategies have proven to work, but they are no guarantees for the present and the future. However, these strategies show that it is possible to be profitable during a cryptocurrency crash.