We have experienced plenty of bearish sentiment in the markets over the past few months, chasing many investors away from the digital asset space. While Ethereum and Bitcoin lost about 75% from their ATH (All-Time-High) just six months ago, the broader market has suffered even deeper.
Why Are Cryptocurrency Prices Going Down?
Crypto prices are going down largely due to the macro-economy situation and liquidation of major funds throughout the industry. Large companies and crypto funds have both gone underwater recently, leaving a far-reaching impact on the entire cryptocurrency space as we watched prices plummet.
Macroeconomy x Cryptocurrency
The macro-economic environment around the entire world has been largely negative ever since the COVID-19 pandemic. Equities have destroyed any gains accumulated throughout the extended bull run and all capital markets are slowing significantly, as people globally grow wary of the current economic situation.
Inflation is at a four-decade high in the US and interest rates are on the rise, with a very uncertain economic outlook ahead. These macro-conditions provide a good reason for investors to be wary of the market and the market downturn.
Regulatory uncertainty around cryptocurrency only makes the matter worse. Major lawsuits are ongoing in court, including a major battle between Ripple Labs, issuer of the XRP token, and the SEC. With the SEC suing the largest US exchange, and recently public company, Coinbase as well as other cryptocurrency projects. The Securities and Exchange Comission is arguing that many of these cryptocurrency tokens, are actually unregistered and illegal securities.
These lawsuits in addition to the global economic condition have investors concerned about the future of the industry.
The Terra Luna Collapse
Terra Luna saw a glorious rise to the top ten of cryptocurrencies, based on marketcap size. Thought of as an extremely reputable company, the terra ecosystem was made up of both a token (LUNA) and a stablecoin (UST). These two digital assets were economically intertwined, and when the UST stablecoin began to de-peg, the entire Terra Luna ecosystem began to collapse.
UST, being a stablecoin, was supposed to stay steady at exactly one US dollar. After a problem with a liquidity pool, UST began losing it’s dollar peg. As the asset sank in price, investors lost faith in LUNA, knowing it would be sold in large amounts by the company to regain the peg in UST. What was once one of the largest cryptocurrency players quickly became a piece of history.
3 Arrows Capital was the first major corporation to file bankruptcy, becoming insolvent after having too much leverage in Terra Luna. After 3AC went down, cryptocurrency asset manager Voyager was forced into bankruptcy due to capital tied to 3AC. A domino affect started bringing the cryptocurrency industry down one by one, impacting everyone along the way.
BlockFi, another major cryptocurrency player, was close to becoming insolvent, but was saved by Sam Bankman-Fried, CEO and founder of FTX Exchange. Sam and FTX have recently been hailed for their assists throughout the industry. They have offered loans and lines of credit to several of the large companies in the space. Sam Bankman-Fried says he feels it is “his duty” to help the industry grow and move forward, with or without monetary incentive.
With so much negative news surrounding the blockchain space, it makes perfect sense why investors may be worried. The long term thesis for investing in the space has still not changed, making now a potentially great time to enter the market. The industry is still growing every single day, with adoption only seen in the early internet days. Regulation will help the industry gain legitmacy and allow trillions more dollars to be invested in the space, while the economy works itself out.
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