If you trade or hold cryptocurrencies or keep tabs on current events, you should ask why is the crypto market down? The massive bearish ‘red’ candlesticks show one of the strongest sell price movements in the history of cryptocurrency. Digital assets show greater volatility due to an increased sensitivity to stock market fluctuations. Wondering why crypto market is falling? It is a cause-and-effect situation; fluctuating stock prices trigger a deep bearish move in cryptocurrency prices.
Why Bitcoin is Falling
Why is crypto market falling? There are two major reasons why crypto market is going down:
The US is grappling with high inflation and market stabilization
The crash of terraUSD (UST) stablecoin.
Macroeconomics of the US high inflation rates
The US is currently enmeshed in its highest inflation rate in decades. The combined effect of the COVID-19 pandemic and other events have resulted in a high inflation rate. Problems began in early 2020 when the US Federal Reserve Bank (The Fed) lowered interest rates on borrowing. These resulted in the highest inflation in four decades, causing more money to be pushed into the system. The increased liquidity caused a two-prong effect; an increase in the price of financial assets and a seemingly lop-sided gain. As the liquidity increased, the government was forced to increase the interest rate by 0.5%; it is also expected to increase the rate. The government also took actions to reduce inflation by reducing the money supply. Although the actions are justified, they resulted in a sharp 20% fall in stock and indices prices, notably the Standard & Poor’s 500 and Nasdaq. Wondering why crypto is falling? The sensitive crypto market responded to the market events, and its market capitalization dropped from $3 trillion in November 2021 to its current circa $1.3 trillion.
The crash of terraUSD stablecoin
TerraUSD (UST) is a stablecoin. The token was created alongside Luna by the Terra Network, a South Korea-based blockchain project. Although UST is tied to the US Dollar, it is physically backed by the Luna token, i.e., Luna tokens are equal in value to UST tokens. The Terra Project used Luna as collateral for UST. Problems arose when, recently, investors sold UST tokens worth hundreds of millions. This put massive pressure on Luna, and investors began to sell for various reasons, and the value of UST fell to less than $0.1. The resulting market-wide pressure is why bitcoin is falling today. Bitcoin is leading other cryptocurrencies in a massive selling movement that has wiped out billions of dollars worth of digital assets with no end in sight.
Take a look at why Luna and UST crypto assets impact the crypto market.
What are Luna and UST cryptos?
Luna and UST launched in May 2019 when Luna traded at about $3. The price of Luna quickly increased, reaching as high as $116 last month. UST was originally pegged to the US Dollar, traded at $1. Stablecoins are cryptocurrencies whose price and value are tied to the value of a fiat currency. Physical deposits of the tied fiat typically back them to ensure stability. They were first proposed to provide stability and safety from the volatility of cryptocurrencies. The Terra Network provides UST. Luna became the collateral for UST to keep the latter at $1; if the price of UST changes from $1, UST is "burnt" and exchanged for a corresponding amount of Luna. This arrangement worked well until UST broke its dollar peg and fell below $1. This has caused cryptocurrency exchanges to delist the coin.
Experts believe that stablecoins are the culprits of the current bearish conditions. There are two talking points; the perceived flawed Terra ecosystem and the doomed efforts of the Luna Foundation Guard (LFG).
Experts believe that the Luna ecosystem is flawed, starting with its design. Whereas other stablecoins are backed by physical deposits of equivalent fiat, the UST was designed to be backed by the Luna, another digital asset. This fundamental flaw raised a question: can a digital asset be collateral for another digital asset?
Once the price of UST plummeted and put massive pressure on Luna, the LFG made a failed attempt to stem the free fall. The LFG transferred all of its asset reserves to bitcoin exchanges to protect the UST and keep the price pegged to the US dollar. The reserves were quickly depleted and are now zero, causing the UST to fall. The ripple effect caused the Tether USD, another stablecoin, to temporarily lose its dollar peg, falling to $0.97 but then recovering to $0.99. This is why crypto is falling day by day.
But what is the correlation between stock, indices, and cryptocurrencies?
Does cryptocurrency correlate with stocks?
There is a strong correlation between the different financial markets. The stock, forex, and cryptocurrency markets are all related, and an opposite movement in another may trigger price movements in one. Gold, for example, has an inverse correlation with stock prices. The price of gold is almost always sure to increase when the S&P 500 falls and vice-versa. In 2022, the price of gold rose by 3%, while the S&P 500 fell by 16%. The rising inflation and market uncertainty mean that investors are now looking for a safe and stable asset to preserve value. The crypto market is falling today because investors do not consider the volatile crypto and digital assets as reliable assets to preserve value in this period. Perhaps, stablecoins would have been the better option, but as they are pegged to the dollar, it is essentially the same thing to save money in fiat. The recent Luna-UST price drop also emphasized the risks of saving funds as digital assets, which is why cryptocurrency is falling. But there is more.
The Fed, to fight inflation, has increased interest rates by 50 basis points. The Fed will also start deducting $3 billion and $17.5 billion from the US treasury bonds and mortgage-backed securities. All these actions are in a bid to lower the consumer price index (CPI), which rose by 8.3% last month.
Other external factors, such as the ongoing war on Ukraine and the prevailing effects, have caused great market instability among investors unsure of the next move. Experts have mentioned a lack of momentum to reverse the current bearish trends as panicky investors are selling off to minimize losses and looking for a safer store of value. It is not a coincidence; therefore, cryptocurrency is falling while the stock market is down. Asides from crypto falling today, the general confusion about future market moves presents a question; are cryptocurrencies safe options during inflation?
Can Cryptocurrency Protect Against Inflation?
Despite its volatility, bitcoin is often regarded as a good asset for preserving value. Supporting arguments mention the overall increase in bitcoin’s price despite growing inflation. Some cryptocurrencies are also considered good stores of value. Bitcoin’s price has halved since inflation began, but analysts believe that bitcoin could provide a good hedge against inflation in the next decade. Bitcoin has historically gone past its previous high after a long bearish movement. Many may be asking why the crypto market is falling; investors may see the period as a time to organize their portfolio and position for the next bull run.
Should You Buy the Dip in Crypto?
In times of massive price falls, investors often talk about buying the dip. Buying the dip means purchasing more of an asset when the price falls. It is a great strategy for making massive profits when the price recovers and surpasses previous levels. The buy the dip strategy is a two-edged sword that may bring smiles or tears depending on the market. Professional traders often follow a rule: "never try to catch a falling knife." If you decide to buy the dip, catching a falling knife, you risk buying more of the asset despite future price falls. A sudden massive and swift bearish move may wipe you out and liquidate your portfolio. It is best to carefully observe the market and only buy the dip when certain of recovery and using small funds. As you seek answers to questions like why is crypto falling so much? It would be best if you took the time to study the market and prioritize the safety of your assets. Nevertheless, during bearish markets, your best bet is accumulating bitcoin using the ASIC miner hosting model.