By now, if you are a crypto investor or enthusiast who follows the crypto market, then you are aware that the crypto market has been in a downtrend as of May this year. Since November 2021, when Bitcoin hit its all-time high at $68,721.93, the cryptocurrency market crash has meant that the market has seen over a $2 trillion downtrend. However, the only question that stands is why?

The fact is, there is no one simple answer for this. However, a handful of factors working together may be to blame. 

  1. Inflation and the FED interest hike
Alex Shah from Bank of America

Image credit to NBC News

Consumer inflation in the United States has hit record highs that were last seen over four decades ago in the 1980s. As a result, the Federal Reserve responded through a policy that included three interest hikes of 0.25% to as high as 1% this year. According to Alex Shah from Bank of America, this was one of the significant factors that caused the massive drop in crypto prices. 

So how do increased interest rates affect the cryptocurrency market crash?

When interests go up, the incentive to borrow US dollars goes down. This means that the supply of the US dollar is inherently going to decrease. The demand for each dollar in the market also increases, resulting in a decrease in purchasing power, meaning the population does not want to spend. 

In such times most people are reluctant to spend their money on relatively risky investments like stocks or cryptocurrencies. As a result, the demand falls and trickles down to the crypto market.

Moreover, a Reddit post by Juicyjuicejuic suggested that cryptocurrencies were developed as a perfect short-term trading tool before being blamed for the coming crash. He went on to add that stocks and bonds are also crashing because most people gambled their money in crypto and took out the money from other assets to do so. 

  1. The rising correlation between the Bitcoin market and Wall Street

Another reason impacting crypto prices is its correlation to the stock market, which has recently tumbled. Bitcoin has long been regarded as an inflation hedge by JP Morgan, but according to the Bank of America, it is more similar to the S&P 500 and the tech-savvy Nasdaq than it is to an inflation hedge. As a result, Bitcoin behaves more like a tech stock and falls when other tech stocks plummet. 

The collapse of TerraUSD (USDT)

The collapse of TerraUSD was yet another source of investor uncertainty in the crypto market. TerraUST, an algorithmic stablecoin, was one of the top stablecoins investors looked at as a haven for avoiding fluctuations in the crypto market. As investors saw the stablecoin dropping, they rushed to withdraw their money, causing what some analysts refer to as a death spiral. 

Most crypto exchanges tried to delist UST and its counterpart LUNA, but the damage from the sell-off had already been done. Over $17 billion in crypto had already been wiped out through the LUNA and UST saga alone. As such, this increased the tension and panic in the cryptocurrency space.

LUN depeged during the crypto market crash

Image credit from Yahoo Finance

Russian central bank’s crypto blanket ban proposal earlier this year

Lastly, another popular theory was a report earlier this year from the Central Bank of Russia (CBR) demanding a blanket ban on all crypto mining and trading. According to the CBR, Bitcoin was a pyramid scheme that would pose a risk to its citizen’s wealth and the financial sovereignty of the nation.

With this move, Russia joined some of the largest Bitcoin mining hubs in banning cryptocurrencies, which might have triggered the crash witnessed in March 2022. This proposal also created a lot of fad, like what happened in May 2021, which led to a sell-off. 

What do experts think about the cryptocurrency crash?

Michael Sailor on the cryptocurrency market crash

Image credit to Michael.com Website

The first bear market in 2022 has been gruesome and set a selling spree in the crypto market. However, many crypto veterans like Michael Saylor, the CEO of Microstrategy, see this bear market as a 30% crash in a long-term bull market. Furthermore, they consider it one of the best entry points into the crypto market. 

For some like Nicholas Weaver, a computer-security expert from the University of California at Berkeley, these are the end days of crypto. This follows a report by the Bank of America that stated the crypto crash was the worst implosion since May 2021 and that it measured up to the 2008 financial crisis or the 2000 dot-com crash. 

What does the future hold for cryptocurrencies?

If you take a step back and look at the entire Bitcoin chart, it is pretty clear that the cryptocurrency market has been in a bull run since its inception up to the 2022 crash. The 2022 crash drove Bitcoin’s price to prices last seen in 2018 during the 2018-bull run.

Bitcoin USD comparison

Source Trading View BTC/USD Price Chart.

However, if crypto history has taught us anything, every gruesome bear market has been followed by a bull market with new all-time highs.