Why are Bitcoin and other cryptocurrencies crashing?

Fears of a 'crypto winter' are taking hold amid broader market dynamics spooking investors

Cryptocurrency markets never close. But perhaps some investors wish they would as the market plumbs new depths, having lost more than $2 trillion in value in a matter of months.

Market heavyweight Bitcoin has dipped below $20,000 and 72 per cent lower than its all-time high in November last year, as of 3pm UAE time on Tuesday. Ethereum, the second-most-valuable digital coin, has now lost 78 per cent of its value from its high in November.

Why Bitcoin crashed

The dreaded FUD is here.

FUD, the acronym for “fear, uncertainty and doubt” used as shorthand by cryptocurrency enthusiasts to dismiss negative information, is seeping into investor sentiment, analysts say.

This is on the back of a 40-year high inflation in the US, rising interest rates in many parts of the world, recession fears and a steady drumbeat of reports telling of widespread theft and fraud in cryptocurrency space.

These macro issues are joined by micro issues unique to cryptocurrency markets, Nameer Khan, chairman of the Mena FinTech Association, told The National.

“Investors have not recovered from the Luna debacle,” Mr Khan said, referring to the collapse of the stable coin when it unpegged from the US dollar, wiping out more than $17bn in cryptocurrency value in May.

The sell-off has been made worse by two of the biggest platforms, crypto lender Celsius Network and exchange Binance, curtailing trading activity, only adding to the fear, uncertainty and doubt.

As the market plunged, Celsius froze withdrawals last month and more recently has been battling insolvency. Bloomberg reported it has started paying off its debts to free up its collateral placed in decentralised-finance applications.

Other crypto firms like Voyager Digital and Three Arrows Capital recently filed for bankruptcy.

Mr Khan said all of this raises the importance of regulating the cryptocurrency space, but for now, there are very limited controls in place to protect investors from exchanges acting how they want or technical issues getting in the way of free trade.

The crypto market, which includes currencies such as Bitcoin, pictured, has lost $2 trillion of its value in six months. Unsplash

The price of Ethereum, the second largest cryptocurrency by market size, has fallen by 70 per cent this year. Investors and analysts are watching to see if it will dip below $1,000. Unsplash

Dogecoin, supported by Elon Musk, is about 90 per cent down from May last year, yet it is outperforming Bitcoin and Ethereum in the current crash. Unsplash

The government of El Salvador has invested $105 million in Bitcoin. President Nayib Bukele's embrace of the cryptocurrency as legal tender is being questioned as the market crashes. Getty

Changpeng Zhao, founder of crypto exchange giant Binance, has compared the current market turmoil to the dotcom bubble of the early 2000s. Still, the company is aggressively pursuing licensing in international jurisdictions and introducing new products. Getty

Tether is the biggest issuer of stablecoins, a type of cryptocurrency pegged to a traditionally stable asset like the US dollar. Most stablecoins are meant to maintain a constant price of $1 and are backed by real reserve funds, making it easy to convert crypto investments into cash. But Tether's financial statements show that may not be true, leaving the issuer and its investors vulnerable. Unsplash

The recent crypto crash can in part be attributed to the collapse of TerraUSD, a stablecoin pegged to the US dollar through algorithms and linked to a "sister" cryptocurrency named Luna. When the price of Luna plummeted, TerraUSD also fell, creating a “death spiral” to practically zero for both coins. Unsplash

On June 12 crypto lender Celsius Network said it had paused customer withdrawals, saying it needed “to stabilise liquidity and operations”. Investors are still waiting, with no signs that the current meltdown will let up. Getty

What happened to Ethereum?

Despite recent promises from Ethereum's founder that it is approaching a major milestone to become less energy-intensive and more environmentally friendly, the sell-off has touched the market's second biggest digital token as well.

Ethereum tokens are secured by a global network of computers called miners that process and verify transactions, similar to how Bitcoin works. But Ethereum has a project in motion to do away with mining, transitioning to a way of securing Ethereum through “proof of stake” which promises to use much less energy.

While cryptocurrency believers are encouraging investors to buy into the dip before this transition, the alt-coin is facing the same shaky market dynamics as any other asset.

Will the cryptocurrency crash continue?

For the first time since February 2021, the value of all digital coins fell below $1 trillion in late June and have remained at that level since. Some analysts are now predicting this sharp decline marks the start of a “crypto winter”, not seen since 2018 when Bitcoin dropped 80 per cent and then took more than a year to find another peak.

Market factors are not encouraging that this will be a short-term pinch. New US inflation figures show that prices still have room to increase, the S&P 500 has entered bear territory and tanking tech stocks are all encroaching on cryptocurrencies, Bloomberg reported.

“If one looks at previous bear markets, Bitcoin has declined around 80 per cent-plus normally, with alt-coins typically doing 90 per cent-plus,” Vijay Ayyar, vice president of corporate development and international at cryptocurrency platform Luno, told Bloomberg.

“If that remains the case, we could see much lower Bitcoin prices over the next month or two.”