Introduction
There are several reasons why the crypto market is suffering a severe crash. These reasons include overleverage, a lack of compelling real-world use cases, and an inability to meet margin calls. Hopefully, these reasons will help you understand why the crypto market is currently experiencing a crash. Sign up on popular platforms such as bitcoin buyer app website to start bitcoin trading.
Inability to meet margin calls
The inability to meet margin calls when a cryptocurrency rally hits a wall is one of the most concerning things that can happen to a cryptocurrency investor. Several factors could trigger this situation, including margin debt. Insufficient capital can cause a massive loss, which could push investors to liquidate their holdings. If this happens, it could send the cryptocurrency market into a tailspin.
Lack of compelling real-world use cases
While Bitcoin has the largest market cap and the most daily volume, the main issue with the cryptocurrency is its lack of real-world use cases. Cryptocurrencies aren’t built to be used for small, fast payments, as the Bitcoin Lightning Network attempts to fix. There is also an issue with payment processing, which is too slow in the United States.
The cryptocurrency market is currently experiencing a meltdown, and the reasons for this are many. The previous bull market was a colossal hype bubble, which popped in 2017, and the recent crash resulted from macroeconomic factors, including inflation. The U.S. Federal Reserve has started raising interest rates, putting a brake on the crypto market.
The cryptocurrency market has been closely correlated to risk assets, and the second quarter of 2018 saw bitcoin post its worst quarter in over a decade. At the same time, the Nasdaq dropped more than 22%. The sharp reversal caught many in the industry off guard. As a result, many big players from Wall Street were not using highly leveraged positions during the period.
With a booming economy and low-interest rates, the price of cryptocurrencies was rising too fast. However, since June, the market has faced turbulence. As a result, many analysts believe that a prolonged bear market will result. Although the last cryptocurrency crash occurred between 2017 and 2018 (see our report below), this latest market crash has been shaped by several events, including the interconnection of different crypto firms, business strategies, and monetary policy.
The recent collapse of the cryptocurrency market has affected millions of investors. Traders bought up crypto and exchanged their fiat for digital currencies. They also used these assets to borrow from each other. Some crypto companies were so heavily leveraged that they had to rely on loans to finance their operations. For example, three Arrows Capital, a Singaporean crypto hedge fund, had huge losses after the collapse of UST and failed to meet its margin call from the crypto lender BlockFi.
The bull case for Bitcoin remains unchanged. It is the first truly decentralized form of money, with no parent company or foundation governing it. In contrast, unstable coins like Terra had a central foundation and interest rate. As a result, investors were scared to invest in them.
Despite this, the cryptocurrency price remains under pressure due to various factors, including inflation, shifting monetary policy, and war in Ukraine. In recent months, the bitcoin price has remained below $45,000 and has only risen above that threshold for brief periods. It has not topped $50,000 since Dec. 25, 2021. While it is far from its all-time high of $68,000, it was still more than double its value two years ago.
The recent volatility in crypto markets was fueled by many investors dumping their crypto positions. Many retail investors, who had been holding the crypto, could not meet margin calls – which require additional funds to keep the position liquid. This subsequently sparked further contagion. Another factor contributing to recent cryptocurrency asset volatility is the exposure of crypto firms to risky bets. For example, Terra is vulnerable to hacking, which has forced it to suspend withdrawals temporarily.
Overleverage
Overleverage is one of the critical reasons for cryptocurrencies’ recent collapse. The rally was spurred on by meager interest rates and a low cost of funds, but since then, interest rates have begun to rise, and the price of cryptocurrencies has plunged precipitously. This downturn has been compounded by the fact that many participants in the industry have taken on excessive leverage and gotten caught off guard when the price of crypto cratered. This has caused forced selling that led to further declines.
Bitcoin is experiencing a reversal of fortunes, thanks to overleveraged traders selling their positions to cover their losses. As a result, prices have plummeted, and many people are becoming bankrupt. But that doesn’t mean that you should get out of the cryptocurrency market entirely.
Conclusion
As a result of these high-risk dynamics, the rally in cryptocurrencies came to an abrupt end around 2022. The monetary conditions were incredibly low in the first few years, which helped fuel the growth of cryptocurrencies, but since then, interest rates have risen, and the market has been flat. Furthermore, many participants in the crypto industry have exacerbated this downturn by taking on too much leverage. This prompted them to be caught off guard when their investments declined. This forced them to sell, further depressing the price.
