- Crypto markets have gone into meltdown this week, wiping $200 billion from the market
- Combined market value of all cryptocurrencies has fallen to about $1.2 trillion, a loss of $1.8 trillion since November 2021
What is pushing the crypto market down?
Investors are in risk off mode and are running to safe haven assets as global central banks raise rates to combat inflation. The rate rises are contributing to the rising value of the USD against the Euro, the GBP and the Japanese Yen among other currencies. This has made it particularly difficult for stablecoins, which peg their value to legal tender like the USD, to stay consistent with the dollar’s value. And, because liquidity is limited, a few withdrawals from a platform can cause a flood, creating a negative feedback loop.
Bitcoin, the largest cryptocurrency by market cap, has lost more than a quarter of its value, and is down 37% so far this year, far below the peak of $69,000 it hit in November 2021.
Ethereum has also declined this past week by about 20%.
Tether, the largest stablecoin, has started to recover and is almost at parity with the USD.
However, the price of Luna has fallen to practically zero due to the collapse of the TerraUS stablecoin to which it is linked,
Is this the end of crypto?
Although this is a significant bump in the road, there are already signs of recovery. Cryptocurrencies and their associated products are not just solely owned by smaller retail investors; they have, over the past five years, increasingly become part of the broader set of asset classes that institutional investors hold. And part of what we may have seen over the past few days is a type of “forced selling” as these investors looked to rebalance their portfolios to meet their risk mandates. It must be remembered that forced selling in anything often creates a situation where the market overshoots before correcting.
Does this mean that risk has declined?
Cryptocurrencies and their associated products will continue to be investments with a high degree of volatility.The market is particularly worried now about assets with high valuations, like Crypto with uncertain revenue streams. This is one of the reasons why we have seen tech stocks like Apple and Alphabet and larger growth stocks like Amazon decline this year. The other issue for crypto is that, although they have been increasingly integrated into larger portfolio holdings by institutional investors, they are still a rather illiquid market, which makes them subject to greater volatility. Given the events of the past week, although the situation is calming down with supply and demand starting to stabilise, there is still a degree of nervousness that will only really begin to abate once inflation slows, interest rates reach neutral and policy stabilises, and investors feel they can be in “risk on” mode again.
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