The cryptocurrency market is currently experiencing extreme volatility. The decline in trading activity and price of cryptocurrencies can be attributed to the drying up of liquidity as a result of rate hikes by central banks.
After the virtual currencies had a dizzying rally in 2021, crypto companies started heavily advertising during the Super Bowl just a few months ago.
Companies like Coinbase, which operates the largest cryptocurrency exchange in the United States, have announced layoffs today as Bitcoin and other cryptocurrencies have plummeted.
According to Oanda’s senior markets strategist Ed Moya, everyone is fleeing the cryptocurrency market as confidence in the sector plummets. Read on to find out why the cryptocurrency is losing popularity. Here’s a look at why the cryptocurrency trend is declining.
Why is the cryptocurrency sector declining
Due to the fact that they are suffering from the same forces that are affecting stocks and other assets.
As a result of consumer price inflation running at its fastest annual pace in more than four decades, the Federal Reserve has been aggressively raising interest rates.
The Federal Reserve raised interest rates by a quarter of a percentage point on Thursday and signaled that it might do so again at its next meeting in July if necessary to curb inflation.
Increasing fears of a recession are being fueled by higher interest rates. Which make borrowing more expensive for individuals and businesses. The broad S&P 500 index entered a market crash in the week (when an index fell 20% or more from its recent high), continuing a precipitous decline from January’s all-time highs.
There has been little protection for cryptocurrencies. Bitcoin’s value has dropped by about 70% since it reached another all-high in November. And its competitors have also seen significant declines in value. Both Ether and Dogecoin have lost roughly 70% of their value this year.
Supporters of Bitcoin have long asserted that the cryptocurrency would serve as an “inflation hedge,” but this has not been the case. Bitcoin’s value has dropped alongside those of tech stocks.
According to economics professor Eswar Prasad of Cornell University, “what this episode, this collapse in crypto valuations, shows is that cryptos are by and largely speculative financial assets that are subject to macroeconomic forces. Such as changes in interest rates.
What does this means for cryptocurrency companies
Some businesses are having trouble because of the sharp drops in cryptocurrency prices.
Celsius, a company that accepts cryptocurrency deposits from customers and makes loans using those funds, has halted withdrawals due to financial difficulties. For a few hours on Monday, Binance, a cryptocurrency exchange, disabled Bitcoin withdrawals.
Just weeks after the breakdown of a stablecoin called TerraUSD, the challenges at Celsius are undermining a sense of trust in the broader cryptocurrency world. Crypto firms are reacting by rethinking their strategies.
The workforce at Coinbase, a platform for buying and selling bitcoin and other cryptocurrencies, has been cut by nearly a fifth. The chief executive officer of Coinbase reportedly stated in an internal memo that the company “grew too quickly.” We seem to be approaching an economic downturn, Brian Armstrong wrote.
The “crypto winter” may eventually bring about the “crypto spring,” according to some cryptocurrency supporters. In the past, severe recessions were followed by robust recoveries. Moya, an Oanda analyst, argues that the current economic climate has altered the industry’s outlook on cryptocurrencies.
Indeed, with the Fed maintaining its aggressive interest rate hikes and inflation remaining high, further suffering is likely throughout all markets. Including cryptocurrency exchanges.
What this means for those who got into crypto
Millions of people have been given a rude awakening after investing in cryptocurrencies. Especially those who joined the fad late last year.
“The pinnacle of crypto mania,” as Prasad puts it, occurred in the year 2021. There was a threefold increase in the value of all digital currencies around the world. Ads during the Super Bowl cost millions of dollars, and companies like FTX, eToro, Coinbase, and Crypto.com signed sponsorship deals with professional sports teams.
Crypto.com brought on Matt Damon as their spokesperson, while FTX advertised with grouchy comic Larry David. These businesses are warning consumers that they must adopt cryptocurrency or risk missing out on the financial future.
Prasad claims that many ordinary people were duped by the “technological razzle-dazzle” of cryptocurrencies into investing in them without fully understanding the risks involved. The market value of all cryptocurrencies has dropped to around $1 trillion today. Furthermore, Bitcoin is currently worth nearly half of what you paid for it on February 14.
How the situation will evolve for cryptocurrencies
Even fundamental questions, such as who is responsible for regulating crypto markets, remain murky due to the relative youth of the industry. At the present time, both the SEC ( Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission) assert jurisdiction over certain segments of the cryptocurrency market.
But many experts believe there is currently no threat to the broader financial system. When compared to the value of major corporations like Apple, the cryptocurrency market is still relatively small. However, this most recent downturn has prompted significant worries.
Read also: Global cryptocurrency regulatory framework: FSB, IMF and BIS lay the groundwork for common rules