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June Katz 6 min read

Why Crypto Market Is Down Today: Global Reasons

Why Crypto Market Is Down Today: Global Reasons

The bitcoin exchange rate has experienced a lot of falls in recent years, but in the end, it has recovered every time and reached new heights. In the last six months, almost all cryptocurrencies have significantly dropped in price.

At the end of last month, after a prolonged fall, the first cryptocurrency began to show some positive dynamics, gaining a foothold at $ 32 thousand. Against the background of the rising inflation rate in the United States (almost 9% per year), bitcoin rapidly flew down and reached $ 27 thousand. Then analysts said that with an increase in inflation, the BTC rate would inevitably fall.

On Monday, June 13, the bitcoin exchange rate fell to a price of $ 25 thousand, and on June 19, bitcoin collapsed to $18,707 (according to the Binance exchange). The first cryptocurrency pulled other coins along with it.

Ethereum has fallen in price and now costs about $ 1.1 thousand, Solana has lost as much as 18.2% in a week, and the exchange rate has dropped to $ 37 (at the time of 06/21/12)

Reasons

The collapse of the cryptocurrency market will not surprise anyone. Even though the cost of bitcoin and Ethereum has increased dramatically over the past decade, fluctuations in this market have become familiar.

Among the reasons for the fall of the cryptocurrency, experts name three — of which Bloomberg considers inflation statistics in the United States to be the main reason: in June, the US Federal Bureau of Statistics reported that the main consumer price index (CPI) increased by 8.6%. Inflation excluding food products increased by 6%.

This is a record since 1981, and the statistics turned out to be worse than analysts' expectations, which assumed an increase of 8.3% for the CPI and 5.9% for core inflation.

The second reason is the tightening of monetary policy in different countries. First of all, the US Federal Reserve, which in May raised the base rate (according to which the Central Bank issues loans to commercial banks) by 50 basis points, to 0.751%. This is the strongest increase since 2000. Because of this, people prefer to invest in assets less risky than cryptocurrency.

The cryptocurrency market is also affected by the collapse of the TerraUSD (UST) stablecoin and related proceedings, which undermined investors' faith in such projects, Bloomberg writes. After it lost its binding to the US dollar, the Luna cryptocurrency used for its release collapsed by 76.4%. Luna Foundation Guard, which is behind TerraUSD, spent $2.9 billion in bitcoins to protect the binding of the token to the dollar — almost all of its reserves.

On June 10, Bloomberg, citing sources, reported that the US Securities and Exchange Commission had launched an investigation into Terraform Labs and its algorithmic stablecoin TerraUSD. The regulator will examine whether the platform violated the rules for protecting its investors.

Shares of Crypto Companies Also Fell

The negative dynamics of the cryptocurrency affected the shares of industry-related companies on the stock market. In particular, the value of Coinbase Global Inc. paper has dropped by 13% since the beginning of the year, Marathon Digital Holdings Inc. — by 24.4%, and Riot Blockchain Inc. — by 21.7%.

After spending "hundreds of millions of dollars" on campaigns, sponsorship agreements, and advertising at the Super Bowl, most cryptocurrency firms have reduced marketing costs. This is reported by The Wall Street Journal. 

Binance CEO Changpeng Zhao said that crypto winter is the right time to hire new employees and further develop the business.

Activity in the sphere has been reduced by Crypto.com and Gemini Trust. The first, after spending $40 million in January, allocated $2.1 million in May for commercials on the eve of the Super Bowl. The second one spent $478,000 last month — eight times less than in November ($3.8 million).

Terra Crash

The Terra incident is undoubtedly one of the highest-profile events in the history of the crypto industry. So far, no DeFi project has reached such gigantic proportions before its collapse.

In March 2021, Terra launched an application called Anchor, which offered profitable deposits, which forced people to buy Terra to then deposit it into their account and get a 20% profit. This attracted a lot of new investors.

The dizzying growth of Terra USD (UST) and the popularity of algorithmic stable coins have been a crypto trend for a long time and inspired many developers to create similar projects and reserve crypto funds.

However, everything changed in a matter of days: on Wednesday, May 11, Terra USD lost its peg to the US dollar — its price fell below $ 0.23. The LUNA cryptocurrency used to issue the stablecoin has fallen by more than 80%.

Some market experts believe that the Terra incident, regardless of the outcome, will have serious consequences for the cryptocurrency market. Blogger Dennis Porter noted that regulators use the collapse of UST as the main argument in favor of total regulation of stablecoins and promotion of CBDC.

US Treasury Secretary Janet Yellen said that the unbinding of Terra USD exposed the need to "create a regulatory framework for stablecoins aimed at minimizing volatility."

According to experts, the main reason for the "death" of LUNA was the weakening of the binding of the UST stablecoin to the US dollar. It was TerraUSD (UST), according to the creators of Luna, that was supposed to become a "bridge" between tokens and fiat, but in practice, it turned into a disaster.

The path to the rebirth of Terra, if at all possible, will be long and thorny. After all, the main problem lies not in the technical component or the mechanism of binding to fiat, but in restoring user trust.

Mutual Influence of Markets

Bitcoin is increasingly tied to the world market. And, accordingly, it becomes dependent on its fluctuations. The dynamics of bitcoin this year are almost identical to the fluctuations of the US Nasdaq Composite stock indexes, which are dominated by shares of technology companies. The indicator has dropped by 8.3% since the beginning of the year.

Sentiment in traditional markets and cryptocurrency markets can mutually influence their dynamics, analysts at the International Monetary Fund (IMF) say. "A sharp decline in bitcoin prices may increase investors' flight from risk and lead to a reduction in investments in stock markets," experts write.

Summary

The exchange rate is based not only on promises but also on faith in these promises. The more faith the promisee has, the more stable the course.

Recently, more and more analysts are predicting a collapse of Bitcoin almost to zero. According to Guggenheim Partners director Scott Meinerd, bitcoin will fall to $8 thousand, bitcoin critic Peter Schiff admits a rate of $10 thousand, and Galaxy Digital founder Mike Novogratz is confident that the "crypt" will fall further.

However, such prophecies in no smaller quantities accompanied every protracted decline in the cryptocurrency market which each time regained its position.

Against the background of the fall of cryptocurrencies, the founder of the world's largest crypto exchange Binance Changpeng Zhao has repeatedly said that digital money cannot be evaluated by its falls. He wrote: from a historical point of view, "if you bought bitcoin every time the headlines "bitcoin is dead" appear, you would have succeeded."

Zhao backed up this statement with the fact that in 2011 bitcoin fell below $ 20, in 2015 below $200, and in 2017 — below $ 2000. And in 2022, bitcoin fell below $ 20 thousand. Zhao does not doubt that the leading cryptocurrency will begin to rise in price at auction.

But it is worth understanding: when exactly bitcoin or ether will go up, no one can predict now.


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