By now, any investor who follows crypto knows the market crashed and burned this week. The only question that remains is why?
The truth is, there’s no simple answer, although a handful of factors working in tandem may be to blame.
Rising inflation, interest rate hikes, and geopolitical instability caused by the Ukraine war could be partly to blame, Bank of America global crypto and digital asset strategist Alkesh Shah told Coins2Day this week.
Those factors have created strong headwinds for crypto. Consumer prices rose more slowly in April than in the month before, but still faster than economists had expected. The Fed hiked interest rates half a percentage point this month, the first time it has done so in 22 years. And in Ukraine, Russia shows no signs of letting up on its invasion.
As a result, crypto fell big this week with $200 billion in value erased in just 24 hours on Thursday. Bitcoin, which makes up around 44% of the crypto market, dropped to a 90-day low of $26,350. Although the cryptocurrency recovered to about $30,000 on Friday, it was still down 15% for the week and more than 56% from its November high of $69,000, according to CoinMarketCap.
Another factor weighing down crypto is its correlation to the stock market, which itself has tumbled recently. Although long-touted by supporters as an inflation hedge, Bitcoin is behaving more like a risk asset, Bank of America analysts wrote earlier this month. Bitcoin, the largest cryptocurrency by market capitalization, is much less correlated to gold, the most notable store of value, than it is to the S&P 500 and the tech-heavy Nasdaq.
Because crypto moves much more like a tech stock than it does an inflation hedge, when tech stocks tank, so do digital assets. Tech stocks started the week poorly with the Nasdaq closing down 4% on Monday and then closing down another 3% on Wednesday before regaining some ground on Friday afternoon. This week, the Dow fell more than 2%, the S&P 500 tumbled 2.5%, and the Nasdaq dropped 3% in a losing week for the major averages.
One source of investor uncertainty over crypto was the collapse earlier this week of TerraUSD (UST), previously a stablecoin darling. The so-called algorithmic stablecoin cratered the broader crypto market when it fell well below its theoretically fixed peg to the U.S. Dollar. The point of the stablecoin, and others like it, was to offer a safe haven for investors seeking to avoid the fluctuations in other cryptocurrencies like Bitcoin and Ether, by holding a constant value, no matter market conditions.
In this case, UST lost that peg and traded as low as 13 cents on Friday after a week of turbulence. Meanwhile, Luna, its sister cryptocurrency, became nearly worthless overnight after trading for $80 a week earlier. As investors saw the stablecoin dropping, they rushed to withdraw their money, causing what some analysts have called a death spiral. Major crypto exchanges ultimately delisted both Luna and UST to protect consumers.
Although some analysts have told investors to stay the course, others have described the crash as a major milestone or the end of days. A new report by Bank of America Research says it was the worst implosion since May 2021, and that it measures up to both the 2008 financial crisis and the dotcom crash in 2000.