14 May , 2022 By : Kanchan Joshi
It’s been mayhem in the world of cryptocurrencies over the past few days. With tumbling equity markets, geo-political tensions and the lingering pandemic creating the perfect storm, it has to be one of the most trying times for investors, and especially for the crypto investors.
Let us look at the stats. Bitcoin, the world’s largest cryptocurrency, is back to its January 2021 levels at $27,194 (as on May 12, 2022) and has lost over half its value since it hit its peak of $68,990 in November 2021.
The world's second largest cryptocurrency by market capitalisation, Ether fell by 23% to $1,841.12. Other cryptocurrencies such as XRP have fallen by 34%, Solana is down by 38%, Cardano has tanked 35%, Stellar has fallen by 29%, Avalanche is down by 39%, Polkadot has tanked 32% and Terra USD is down by 27%.
All in all, the global crypto market has lost approximately $830 billion in market capitalisation within six weeks. All of which leaves one question unanswered – where does the buck stop and how many more losses can the investors take?
Unfortunately, the nature of problems surrounding the crash of crypto coins makes it difficult to predict the correct response to this valid question. Here’s a bitter truth though, there are higher chances of a further fall than there is of a recovery in the crypto market. To know why, here are some problems facing the crypto as well as the global equity market. Notably, it’s difficult to predict when these problems may come to an end to reverse the bloodbath on crypto prices.
Interest Rate Hikes
Ever since the US hiked interest rates to contain its highest-ever inflation levels in four decades, global markets have gone berserk. The RBI recently raised rates in India too, with the rupee going into a freefall. The selloff in equities around the world has hit the crypto market pretty badly too.
Russia - Ukraine war
The war in Ukraine refuses to show any sign of slowing down. Meanwhile, prices of essential items such as wheat exported by Ukraine are expected to go up as the country fights for its survival. Supply chain issues are back in headlines as well on account of the war as well. With no one knowing when the war might end, things aren’t looking rosy for global growth in the wake of the pandemic ebbing away, making it difficult for crypto assets to find growth avenues.
Downfall of UST stablecoin
One major reason for the current selloff in the crypto market has to do with one stablecoin – TerraUSD (UST). Stablecoins are pegged to fiat currency and are supposed to be more resilient compared to volatile cryptocurrencies.
UST recently got ‘depegged’ from the US dollar and instead of maintaining its value at $1 on par with the US dollar with which it is pegged, the stablecoin is quoting a price of $0.45 – huge drop of 55 per cent. This has had a direct effect on Terra Luna (LUNA) with which it is interlinked to drop a massive 97% from its all-time high of $118 as seen in April to just $0.37. The UST crisis has rippled through the crypto industry and sent prices of almost all well-known coins down by a considerate amount.
What should investors do? It might be the most difficult thing to do but the best solution is to simply Hodl your assets. Don’t sell them in panic, however grim the picture might be. Remember that the value of crypto assets has risen manifolds during bull rallies and there’s no reason why it can’t happen again.
The world needs to see some positive signs coming from somewhere to be comfortable to invest and raise the value of crypto assets. The increasing use cases of crypto assets and blockchain technology along with the phenomenal rise of NFTs (cricketer Rohit Sharma announced his personal NFT drop on the day crypto assets tumbled worldwide) also makes for a compelling case to simply sit tight and wait for the tide to turn.
For those looking to invest in cryptocurrencies, my suggestion would be to wait awhile until the bottom is closer. You don’t want to invest in a new technology and watch its value go even further down. Remember to keep a watchful eye out for positive signals and follow global news and equity markets with interest to gauge the mood of the crypto world as well. Back to the question of where does the buck stop, the simple (and complex) answer is that it doesn’t, not in the near future at least.