Crypto Crash 2022: What is causing the dip?
We stumble upon an article earlier written by cointelegraph titled “Nexo co — founder targets Bitcoin at $100k mid — 2022” and wonder ourselves how great it would have been if it had achieved that target? Unfortunately that’s not what happened as Bitcoin instead went in a reverse way although there were promising signs by the end of 2021. So what happened to the crypto market recently throughout 2022? What can be the possible causes for the recent dip in the market?
Crypto Crash 2022
There was a lot of optimism at the end of 2021 as Bitcoin achieved its all time high status of $68,000 which led many experts to believe that it will continue its bull run to 2022 but unfortunately they didn’t factor the economical factors that were going on in the world. While Bitcoin was predicted to hit somewhere in between $100,000 to $200,000, Ethereum was estimated to hit the $10,000 mark as its ecosystem began to grow.
Of course this prediction was based on good market conditions and the expectation that investors will continue to pour money into the space. The Cryptocurrency Market Cap also reaches an all time high of $3 Trillion and turning up as the best performing asset class rivalling the stock market in terms of returns and this was before the dip in December.
Utility coins were on the rise as thousands of them popped up everyday with various different functions, among them Solana which is hailed as the heir to the Ethereum Network. Solana began in 2020 but failed to gain major traction in the market until 2021 when it began with $1.59 in January 2021 but managed to reach $259 by mid November 2021, that’s a return of more than 250x in the space of 11 months.
These returns and the market itself were obviously in a huge bubble that far overstretched its true valuations and it will go back down towards the justified level. A true example of this is the NFTs market which have witnessed crazy valuations As of April 2022, the CryptoPunks floor price is at an average 73 ETH which means the cheapest price you can buy a CryptoPunks for is over $215,000, while some of the collections could go to $3 Million. There was also a mysterious sale that took place in October 2021 in which CryptoPunk #9998 was sold for a staggering $532 million. Of course this price are not sustainable, as more than 80% of them lose their value not only due to the hype going down but also because of the price of ETH going down.
This does not apply solely to the crypto market, as all asset classes tend to get overinflated on their valuation before experiencing a crash and this can also be seen in the stock market also. Big tech companies like Meta and Apple also have received huge reduction in their valuation as the market starts to neutralize.
Is it forever? Well obviously not as the crypto space do experience their Bull and Bear runs overtime while long term investors are not really bothered about these bumps, there are a few likely reasons as to why the market has been sore lately for traders looking for the next 10x gem or memecoins.
Some Possible Reasons for the Dip
1. The Never Ending Chapter of the Pandemic
Throughout 2020 and 2021, the pandemic has come with different variants and although the pandemic has since recovered in 2022, the new outbreak in China may cause some worry to investors and traders out there. We know that the crypto space thrived throughout the pandemic, obviously because most people are either unemployed or working from home.
This leads them to dip into the crypto space, with a hope of making a living or earning additional income through becoming an NFT creator or even flipping coins. This was obviously further fuelled with the government inflating their money supply and providing relief checks to people that most of them went to the crypto space and stock market. As those investments dried up and people started to get back to work, it is quite believable that the market will experience a pullback from its highs.
2. War Tensions
Another source of uncertainty is the war that is going on between Russia and Ukraine as it not only affects the both parties involved but also the rest of the world. People are unsure of what the future may hold and they will tend to likely steer away from Risk on assets like cryptocurrency which are well known for its returns but also its volatility.
The War also affects people in another way called Inflation considering that Ukraine and Russia are two of the biggest exporters of Natural Resources such as Oil, Gas and Wheat, a limit of these resources will tend to jack up price for almost any good in the market. This further increases the uncertainty as people’s capability to risk their money become depleted due to the rise in the expenditure.
3. Interest Rates the only solution to Inflation
When we discuss the topic of inflation, the huge covid relief provided to our bank accounts was really a source of joy in 2021 but every increase in the money supply will always come with a price in the future. As mentioned before some of them do make their way to the crypto space but when there is too much money supply chasing too few bitcoins, their price will tend to be inflated and that is exactly what happens throughout 2021.
Unfortunately this is also what happens for most of the goods and service out there and this can be a problem if the rates are too high. The only solution to high inflation is raising the interest rates that will cool down some of the investments and buying pressure resulting in a loss of momentum and price. With high interest rates, whales also tend to seek safer ground with traditional investments like Bonds or Special Deposits, as they tend to shield their investments during uncertain times. This makes risky investments like Crypto or NFTs less favorable as they tend to show their volatility during these times.
4. Stablecoin that was not stable
We obviously are familiar with the case with UST, an algorithmic stablecoin with its massive market cap and ecosystem that crashed so rapidly within a couple of days. This not only destroys Terra’s Luna and UST market cap but also other coins in the market. Terra is so heavily integrated with other blockchain in the crypto space, that other coins also take hit as Terra falls.
Stablecoin forms the backbone for transactions in the crypto space but when it fails, it does hit people’s confidence and trust in the market that was already worst due to the massive uncertainty going on in the world. It will take time before Terra and other investors would come back to trust this space.
5. The Downside of Leverage
Crypto is well known for its risk from the amount of meme coins going around to the overvalued price of NFT but one of its main risks is the growing amount of leverage position going on in the market. Of course leverage is not only present in the crypto space but when you leverage something that is already a risky investment in the first place, that you are in for a ride.
With growing platforms such as Binance and FTX offering Margin and Leverage Trading, this leverage is becoming more of a common occurrence in the market. This is all good and well when the market is bullish and your leverage is raking in profits but what if it suddenly went Bearish? Not only do your positions get liquidated but it triggers a massive sell off in the market that greatly affects the crypto market.
6. The Absence of Proper Regulations
At the end of every market, there should be clear regulations that were meant to protect the investors during good and bad times. Unfortunately the stance for crypto has been unclear, some countries adopt it and some ban it, some allow crypto as a method of payment while some only know the trading of these assets. This lack of clarity within the regulations is what causes bad actors in the space to exploit this new maturing space.
Of course we cannot directly link the effect of regulations with the current crash but we can at least learn from incidents like the UST Case or the Meme coin Case to avoid these experiments from going out there and wrecking the market. There should also be proper guidelines as to how these assets are marketed so no famous influencers could wield their power and cause a crash that benefits themselves.
Like every crash that has ever happened in the market cryptocurrency will always come back but a Bull/Bear cycle should be expected now and then. Of course with the recent cases and failures in the market, this crash will serve as a clean up for the overpriced non performing assets that are only surrounded by hype and also support the valuable ones for the long run. It is then people’s job to choose which one will stay for the long run.
We from Nagaya Technologies Pte. Ltd believed that the crypto space as a whole will bounce back from this crash and hoped that this could serve as a lesson for future developments. We understand in the development of Nagaya how important the value of a backup such as Gold is in order to mitigate the volatility happening to a crypto asset. This led to create the world’s first hybrid crypto asset Nagaya that not only supported Gold Backup to offer the much needed stability but also Subsidiary Project to provide its long term growth. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya,io
Or you can talk to us at t.me/nagayaofficial