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Why Bitcoin keeps crashing |  Weather


Bitcoin fell sharply on Monday, briefly dipping below $30,000 for the first time since July 2021. The world’s largest cryptocurrency is now worth less than half of what it was in the fall. Other cryptocurrencies, such as Ether and BNB, saw similar falls, while trading volumes also declined on major exchanges. Some experts are now warning of a “crypto winter,” in which the industry’s stunning growth is replaced by a long period of contraction.

The current downfall of Bitcoin and other cryptocurrencies is caused by a combination of short- and long-term inputs, including larger financial markets and the collapse of a major stablecoin. Here are some of the main factors behind the current crisis.

Bitcoin is connected to the rest of the financial market.

Crypto evangelists have long hoped that the independent nature of crypto would make it resilient to inflation and crises. Bitcoin, the number one cryptocurrency, has no central issuer or controlling authority. This independence from the government, many believe, should ensure that Bitcoin retains its value in the event of economic lows, international wars, or drastic political changes.

But the last two years have proven that to be wrong. When the coronavirus pandemic crushed global markets in March 2020, Bitcoin also fell by 57%. Stock markets and cryptocurrencies then both rallied and rose at a staggering rate, which analysts say was caused by a combination of free time, disposable income and emergency relief money. pandemic injected into the world by governments.

But lately, investors fear change is in the air, as inflation has led the Federal Reserve and other central banks to raise interest rates. For investors looking for a safe harbor, Bitcoin, which oscillates wildly by nature, may seem too risky.

Bitcoin’s drop follows the worst one-day declines in the Dow and Nasdaq since 2020, as well as the S&P 500 hitting its nadir in the past year. The market was disrupted by Russia’s invasion of Ukraine, which exacerbated inflation, supply chain issues and oil prices. Slowing growth in China amid the COVID-19 outbreaks is also contributing to financial concerns. Some crypto evangelists predict Bitcoin’s price will decouple from the stock market down the road, but for now, the two are very much intertwined.

Crypto is inherently volatile.

Even the biggest crypto boosters will tell you that success in the crypto world is far from guaranteed. Its volatility is part of its very appeal to many speculators: that they could make money at much faster rates than normal stockbrokers.

But with the promise of the boom also comes that of the bust. Since Bitcoin’s inception in 2009, there have been several major bear and bull cycles, with short-term investors alternately flooding the market and then losing interest. Many exchanges, especially during peak periods, offer inherently risky propositions, allowing traders to invest with borrowed crypto. If prices begin to fall, whether due to large investors selling their stocks or for other reasons, a lack of real cash flow can contribute to even faster freefalls.

The volume of people investing in crypto at any given time is also highly variable: more than half of traders who held crypto at the end of 2021 had only entered the market that year, according to the trading firm. crypto Grayscale Investments. And it is no coincidence that crypto crashes tend to happen on weekends. This is when investors tend to disconnect, so those making trades can make bigger waves.

Concerns about regulations and security vulnerabilities

Since crypto derives some of its value from people’s belief in it, markets can be rocked by surrounding skepticism or policy shifts. China’s crackdown on bitcoin mining in mid-2021, for example, led bitcoin to fall from $65,000 in April to $35,000 in June. The total crypto market capitalization also fell around the time Elon Musk announced that Tesla would no longer accept bitcoin for payments in May 2021, citing environmental reasons.

Many crypto investors watched with anxiety as governments in countries central to crypto trading or mining, including the United States, China, India, and Germany, moved toward regulation. Meanwhile, the crypto has been rocked by a wave of hacks and security breaches, including a $600 million hack of Ethereum sidechain Ronin. These hacks have shaken consumer confidence in crypto and slowed the growth of potential new buyers entering the field.

The number of real-world use cases that would bring new entrants into the crypto space appears to be slowing down this year, Edward Moya, senior market analyst at Oanda, told CBS News. “There is a belief that the widespread adoption [of Bitcoin] takes much longer than expected,” Moya said. “Right now what we are seeing is that the crypto market is in a wait-and-see mode.”

UST

Some experts also believe that the recent struggles of UST, TerraUSD, one of the largest stablecoins, played a role in Bitcoin’s latest crash. TerraUSD, also known as UST, is a token that is designed to always be worth $1, but fell below 70 cents on Monday as holders panicked and sold their tokens en masse at a pseudo-bank. .

In order to defend the price of UST, the Luna Foundation Guard, which protects the stablecoin, emptied its $1.3 billion Bitcoin stash and purchased an additional $850 million in Bitcoin. “That [action could] add significant selling pressure on bitcoin and could drive markets lower,” Corey Miller, head of growth at dYdX, told TechCrunch. Caleb Franzen, senior market analyst at Cubic Analytics, explained in the same article that “historically negative performance” and “historically negative sentiment” can lead to “continuous selling,” which negatively impacts prices.

big picture

Whether the crypto slide continues remains to be seen. Some think things will only get worse as more and more investors panic. But after the price of Bitcoin fell below $30,000, its price corrected as evangelists “buy the dip” or enter the market at a discount. They believe that amid its daily turmoil, Bitcoin will continue its zooming out growth pattern that it has displayed for the past decade.

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