30 May 2022
Bitcoin (BTC) fell dramatically on May 9, briefly plunging below the $30,000 level for the first time. As for now, the #1 cryptocurrency in the world is worth around 50% of the autumn 2021 price. Following Bitcoin, other digital currencies also fell (Ethereum, Binance Coin, Cardano, etc.). Some crypto experts believe that a “crypto winter” is coming, and the decline will continue.
At the same time, the downturn in the cryptocurrency market is caused by many factors. Let’s consider the reasons for Bitcoin’s collapse in more detail.
TerraUSD Collapse
On May 12, an event—some blockchain experts named it the beginning of the end—occurred. Earlier, wealthy investors (whales in the crypto ecosystem) have borrowed huge amounts of Bitcoin to buy TerraUSD (UST) and make huge profits when Bitcoin price drops happen. UST is an algorithmic stablecoin based on code, constant market activity and trust. Its PEG (price/earnings-to-growth) ratio, which helps to assess the fairness of an asset’s price, was in theory supported by an algorithmic peg to Terra’s base currency, Luna.
Stablecoin is a digital currency backed by real (fiat money, commodities, metals) or virtual (other cryptocurrencies) assets. Peg is a policy of fixing the crypto price to that of another digital or real asset.
Such action caused the UST to depreciate against the USD, resulting in a massive withdrawal of funds. Investors who had earned through Anchor (a crypto lending platform that uses UST) tried to leave the project before it was too late. The “spiral of death” was unwinding and led to Luna’s fall. As of this writing, the Luna coin price is $0.0001.
The ripple effect has expanded to the entire crypto market. Trying to protect the UST, businesses were selling Ethereum (ETH), and it also fell below $2,000 for the first time since July 2021. And when Terra’s co-founder Do Kwon and other big investors sold the Bitcoin intending to back TerraUSD, the BTC began to plummet to the $30,000 level.
Further, sales also fell on cryptocurrency exchanges (by 35% on Coindesk) and NFT platforms (by 58%). All this led to the Bitcoin price falling.
Bitcoin’s Dependence on the Traditional Financial Market
Popularisers of digital currencies for a very long time believed in their stability against the devaluation of money and the drop in production. All because of the lack of centralised management and emission control that helps crypto hold its value.
However, the events of recent years have shown a completely different result. Following the stock markets, the coronavirus pandemic resulted in a Bitcoin drop in price by 57%. After that, the market recovered thanks to the money that governments worldwide provided to fight the disease.
There is another risk factor: central banks worldwide are raising interest rates due to inflation. Among other things, the Federal Reserve System raised the discount rate by 50 bps (basis points). It caused outrage in investment fund circles. Therefore, Bitcoin may seem too risky for those investors who look for safe ways to invest.
The political component also affects the #1 cryptocurrency cost. The Russian invasion of Ukraine has led to skyrocketing inflation, supply chain disruption, and a rise in oil rates. The global market responded with a decline, which resulted in the price of Bitcoin falling. Dan Morehead, CEO of Pantera Capital, believes that Bitcoin and the stock market will decouple soon, but they are still too correlated.
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Crypto Influencer Statements
Simon Peters, senior account manager at eToro, said that crypto investors should remember that some people can post something on social media and cause rapid growth in capitalisation. It happened before with Dogecoin, which gained support from Elon Musk. His tweets caused a sharp rise in the cryptocurrency price.
However, statements on social media can backfire. Therefore, the value of a certain share of digital currencies does not depend on real liquidity but on market sentiment. To avoid this, investors can look to stablecoins. They are backed by real money or other valuable assets, so they are not so sensitive to what makes the bitcoin price drop.
Cryptocurrency Regulation Problems
Regulation issues also affect the crypto value. In September 2021, when the People’s Bank of China banned cryptocurrency transactions and declared mining illegal, the BTC price dropped to $42,000 from $52,000. Plus, the introduction of legal restrictions by the governments of the US, India and Germany caused sharp jumps in the coin prices.
Another factor of a bitcoin price drop in 2022 is a wave of security breaches. For instance, an anonymous hacker drained $622 million from the Ronin, the Ethereum sidechain for the NFT game Axie Infinity. The cybercriminal exploited a vulnerability in the program code and withdrew 173,600 ETH (around $590 million at that time) and 25.5 million USDC.
According to Edward Moya, senior market analyst at Oanda, the crypto market has adopted a wait-and-see mode after these events, so the number of newcomers seems to be lesser in 2022.
Lack of Liquidity
Liquidity has been and remains one of the biggest problems with digital assets. It is especially noticeable when leveraged investors start selling large amounts of crypto. In addition, there are not such a large number of people in the market who constantly monitor great offers. That would explain why does the Bitcoin price drop over weekends.
According to Vin Narayanan, vice president of strategy at Early Investing, big investment funds are not interested in less popular coins, negatively affecting the market. Here is a basic example: a whale sells a large position in a particular asset, resulting in an oversupply, and the bitcoin price keeps falling.
What’s Next?
When talking about the BTC prospects, experts’ opinions were split. Michael Van de Poppe stated that the current Bitcoin price drop is a temporary phenomenon, and the price will go to $34,000. On the other hand, the Andreessen Horowitz fund released a report about the future “crypto winter.” It will be the 4th cycle (after 2011, 2013, and 2017), resulting in consistent long-term growth, driven by the developer and start-up activity.
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