Factors that Led To Bitcoin Crash and Are Still Influencing the Market

The cryptocurrency market is currently struggling to get out of the bearish trend as Bitcoin bottomed to less than $18000 a couple of weeks ago from its previous all-time high value of $69000 in November 2021. This drop of more than 70% in Bitcoin’s value triggered a market crash impacting altcoins and led to a serious panic in the market that investors, as well as traders, removed a large portion of their investment from the market. There are multiple factors that gathered and collectively led to this plunge in bitcoin’s value and caused a serious crash. Some of the important factors that have impacted the crypto market in the past few months are discussed below:

Mandatory Market Correction:

The Crypto market was booming by the end of last year when Bitcoin crossed the 60,000 dollar mark and it was a bullish trend that gained momentum after the pandemic situation and reached its peak in November 2021. Every market whether it is stock or crypto goes through different periods of correction which is a mandatory process that keeps the market healthy and sustains the market cap. A market correction was almost necessary by the end of last year as the volume peaked which is usually followed by a pullback with investors and traders cashing out their investments.

This market correction was inevitable after an all-time high point and it was also mandatory because of the fears of an incoming recession. This market correction usually leads to a bear market when the drop is more than 20% so the dip that occurred in December and followed on to the next few months was actually a healthy market correction and later on other factors added up to prolong that correction.

Negative Sentiments:

Sentiments matter a lot in the crypto market and the social media trends and discussions give more air to these sentiments whether positive or negative. After a market correction at the start of 2022, negative sentiments took over the market. Technical analysts, traders, and normal users started sharing negative views declaring a start of a bear market which led to a massive build-up of negative sentiments among the investors and traders. Investors paused further investments due to fear of risk that the market may fall into a bearish trap. Apart from the hold on investments, major incidents like the bankruptcy of Celcius Network, Three Arrows Capital and the issues of Terra Network led to an increased panic and fear in the stakeholders. The investors and users of these platforms suffered a lot as their funds went into the drain further leading to a decrease in confidence in the market. This also triggered a massive sell-off in the market leading to a drop in the market volume and people opted for breakeven or sold their Bitcoin at loss.

Massive Liquidations:

The frequent and massive liquidations in the past few months were also a reason for the drop in the prices of cryptocurrencies. Liquidation occurs when the asset’s price falls and becomes lower than the initial margin price of the position. The smart contract or the broker closes the collateralized position and the investment in that position is lost. Whenever the price of Bitcoin falls by a considerable percentage, many positions of traders are liquidated and as a result, the price may further go down.

Massive market volatility occurred in January and June of this year resulting in the liquidation of more than $2 Billion and around $530 million worth of bitcoin respectively. The frequent liquidations in the crypto market not only impact the Bitcoin prices but also increase fear and uncertainty.

The Rising Inflation:

Although inflation impacts the people and the prices of commodities but is also indirectly linked to the crypto market and the investments being poured into cryptocurrencies. United States is the leader in global economics as countries trade in US dollars. The inflation rate in the US kept on rising in the current year due to ineffective policies and the uncontrolled printing of dollars to support the economy. Although the US economy gained through these funds and stimulus measures for a while, in the long run, these policies led to an increase in the consumer price index causing a hike in living costs. Moreover, the after-shocks of the pandemic and the current issue of Ukraine and Russia also impacted supply chain operations and further increased the prices of commodities. When inflation is high and it is becoming difficult to afford daily expenditures, the investment sector is adversely impacted. Therefore, the U.S policies, rising inflation, and increased cost of living led to reduced investments in almost every sector, and the crypto market is one of them. Following the uncertain economic conditions, people are hesitant to invest in anything and therefore the crypto market volume is not increasing.

Moreover, the Federal Reserve also announced an increase in the interest rates which further added to the turmoil, and the latest announcement from Federal Reserve Board in June led to a blood bath in the market as Bitcoin fell to around $16500, its lowest value in the past two years.

The Way Forward:

Although there are many reasons and factors that led to this unexpected market crash in the previous few months, a healthy market always goes through these higher highs and lower lows. The market correction ensures more stability, can attract newbies and investors to enter the market at low prices, and usually takes off after a period of consolidation. Moreover, the rising popularity of Bitcoin is attracting institutional investors which could be a turning point for the market.

Most experts believe that bear markets are necessary as they expose the vulnerabilities in small projects and many tokens may vanish in this period as only those will survive that have good fundamentals, use cases, and are aimed at bringing innovation to the digital world. The market may take more time than usual but it will certainly recover with more volume and market cap. However, you are recommended to carry out your research before making any investment decision.