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Why are the crypto markets crashing in 2022

By February 16, 2022February 28th, 20224 minute read

After a seemingly spectacular year of record highs and gains, cryptocurrencies are facing a turbulent time with highly unpredictable price changes.

Cryptocurrencies have faced a rough start to the year, with Bitcoin losing around 20% in value and Ethereum dropping by about 30%. The crash has wiped out more than $1 trillion in market value since November 2021, with the total market value of all cryptocurrencies slipping from nearly $3 trillion in November to around $1.7 trillion a few days back.

Reasons behind the crypto crash

There are many reasons that have caused this early crash – crypto investors taking too much leverage, the lack of liquidity in the crypto market, uncertainty on crypto regulation, and more.

Analyzing the factors behind the crypto market dip

A lot of things are at play when it comes to the crypto ecosystem. Firstly, you have regulatory uncertainty around crypto tokens and stablecoins, such as whether or not they are securities. This generates considerable tension and anxiety for investors and traders in the crypto industry.

Secondly, as Michael Saylor put it in an interview – there is a lot of leverage available offshore. Many crypto exchanges are offering up to 20x leverage, with many tokens being cross-collateralized. Now between them and the DeFi exchanges, you can get even higher leverage than 20x – even 100x. 

More and more investors are taking risks in the crypto space by using debt to finance purchases of crypto derivatives like futures and options. This creates a way for miners to hedge against future price value drops in the crypto coins they’re mining.

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These high amounts of leverage directly cause volatility for crypto in the near term, and the decrease in price values could possibly cause the liquidation of long-term positions. So as crypto prices drop and holders start liquidating their positions, prices could fall down even further.

This, in turn, creates a cycle that is similar to what happened to the stock market in 2008 and is especially dangerous for a market like crypto, which doesn’t possess much liquidity. 

All of these reasons are the primary sources of volatility for the crypto in the market. That being said, again, as Michael Saylor puts it, the crypto market is almost designed to encourage volatility, and this phenomenon creates a sort of love-hate relationship between the crypto ecosystem and bitcoin HODLers.

A fair number of Bitcoin HODLers have been holding their Bitcoin for years now and plan to keep them for much longer, maybe even decades or more. Yet you have got fast money hedge funds that follow a completely different perspective when it comes to crypto.

So you have two entirely different investment mentalities when it comes to Bitcoin and the cryptocurrency market in general. 

Now when they come together, you get the world’s least risky asset supposedly to hold over the next century called Bitcoin and the world’s most volatile fast money market that we know of called crypto, and these two are joined together for better or worse.

Crypto crashes are partly caused by the investments made in cryptocurrencies; therefore, investors need to decide their time frames for holding digital assets like Bitcoin and whether or not they can handle the market downturns, as seen in early 2022.

The present state of Bitcoin and future trajectory

As of January 28th January 2022, the price of Bitcoin has dropped down to around $36,000, losing nearly half of its value since early November 2021 when it hit more than $67,000. Bitcoin isn’t the only cryptocurrency that has felt the initial effects, but many of the top cryptos have been experiencing dips in price value lately.

The impact of this crash has been far-reaching, with other cryptocurrencies like Ethereum, Dogecoin, Binance Coin, Litecoin, and XRP being the ones that were affected the most.

This early 2022 crash presents a great entry point for institutional investors and traders who have not yet experienced the crypto market due to hesitation or any number of reasons.

We saw Bitcoin reach record highs and experience gains never like before in 2021, and they’re a lot of individuals who would be afraid to hold Bitcoin if it was 400% up a year. 

But if it is going for around 40% of its all-time high and consolidating, then it’ll see itself being embraced by well-respected investors, people like Bill Miller, by regulators, institutions, governments, public investors, and public companies who would look at this as a good entry point.

Will the cryptocurrency market recover?

There are several differing opinions and a range of answers available to this question, but at the end of the day, it all depends on the faith that people have in Bitcoin and crypto itself. 

There’s no question that crypto is the future of online transactions, and decentralization offers several important benefits that are absolutely essential for the betterment of our future. 

Hence, the crypto industry will surely recover from this, and with growing institutional support, the rise of new and innovative crypto coins with unique features, and creative areas of application of crypto, it won’t be long before the crypto market again sees new gains and highs.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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