News By  Yuliia Rokytska
Newbie 2347 4 Nov 2022

Why cryptocurrencies are experiencing a decline

By  Yuliia Rokytska 2347 4 Nov 2022
Photo - Why cryptocurrencies are experiencing a decline

In 2022, another cryptocurrency crash happened. Bitcoin fell from all-time high of $69,000 to $20,000, and BTC market capitalization dropped from $3 trillion to $986 billion. Let's look at the main factors that cause

The price of digital assets is subject to a sharp change in market sentiment (sometimes buyers control and drive prices higher, sometimes sellers dominate, sometimes panic and fear influence, and sometimes greed and euphoria can contribute to investors bidding up assets). As a result, Bitcoin and other cryptocurrencies may experience strong price fluctuations even in 5-minute intervals. 

Moreover, if assets reach their peak, they become overbought, which means that there is a strong possibility of a correction to a more realistic level of price in the near future.

Global drivers of crypto decline

In addition to the dependence of cryptocurrencies on the sentiments of investors and traders, as well as the pullback at the maximum, there are macroeconomic trends that cause the decline of crypto prices.

For example, war, inflation, the Fed's interest rate increase, recession - all of these negatively affect the stock and crypto markets.

As the US Federal Reserve increases interest rates in order to try to control inflation, many investors are selling off cryptocurrencies to cut spending. During times of economic imbalance and uncertainty, people prefer to avoid investing in risky assets.

Meaning, the crypto market is experiencing the same stresses as the global economy, which provokes a decline. While the economy has no signs of recovery, there is no need to talk about the growth of BTC.

Bear market chart

Bear market chart

Reasons of crypto decline within the sector

In addition to the external factors of the crypto crash, there are some other reasons related exclusively to the crypto industry. For example, the bankruptcy of core companies, fraud, hacks, breaking promises to the community.  In June 2022, crypto decline was caused by the announcement from the crypto-lending company Celsius Network. They wrote about freezing funds and transfers due to "extreme" market conditions. The platform later declared bankruptcy along with other major cryptocurrency companies. Against this backdrop, the crypto market value fell below $1 trillion for the first time since January 2021.

Panic in the market led to sudden and severe sell-offs in major assets as user confidence was eroded, causing the crypto prices to drop actively.

Overall, Bitcoin fell from $60,000 in late 2021 to $20,000 in 2022, and ETH price dropped to $995 (the highest price was $4,000).

Regulators' actions

Another reason for pessimism in the market, which periodically causes the fall of crypto prices, is the fact that many government regulators and authorities do not consider crypto to be legal tender.

Government officials are skeptical of the new technology and see it as a threat to monetary policy, security and the environment. We can recall China's aggressive attitude towards digital assets. In 2021, the PRC declared cryptocurrency transactions illegal and banned mining. That led to a drop in prices and network hashrate.

Digital currencies are a relatively new technology, so it is impossible to fully assess their impact on the global economy. Cryptocurrencies are volatile, they react sharply to panic market sentiment, so negative events quickly lead to price drops.

However, for experienced crypto investors a dramatic crash of prices is nothing new. For example, in 2018, BTC fell to $3,500 from the previous all-time high of $20,000.