The reasons behind the crashing crypto market

News: Bitcoin and many other cryptocurrencies have been crashing since they hit an all-time high late last year. Bitcoin has lost more than two-thirds of its value since it hit a peak of around $69,000 in November last year.

Ethereum, another cryptocurrency popular among investors, has lost almost 80% from its peak.

As a result, the overall market capitalisation of cryptocurrencies has dropped under $1 trillion for the first time since January 2021.

Why are cryptocurrencies crashing?

It may not be possible to pinpoint the exact reasons why investors are fleeing cryptocurrencies at the moment.

Most analysts believe that the fall in the price of cryptocurrencies is in line with the fall in prices of stocks and other assets as Central banks such as the U.S. Fed Reserve tighten monetary policy to fight price rise.

– As central banks withdraw liquidity from the market, there’s less money chasing assets, which in turn causes the prices of assets to drop.

Others believe that the crash could also mark the popping of the bubble that has driven the prices of cryptocurrencies to stratospheric levels.

Sceptics have long argued that the price of cryptocurrencies seems driven more by speculative fervour fuelled by easy monetary policy than by any fundamental factors.

How do governments view cryptocurrencies?

Some sceptics have also argued that even though private cryptocurrencies can rise to the status of alternatives to fiat currencies over time, governments and central banks may not allow this to happen.

Many countries have taken several steps to discourage the widespread use of cryptocurrencies.

While countries such as China and Russia have opted to impose outright bans on cryptocurrencies, others such as India have tried to tax and regulate them heavily.

Do cryptocurrencies hold value?Cryptocurrency enthusiasts argue that cryptocurrencies such as Bitcoin have always been subject to extreme price swings, and that the current crash is a good time to buy these virtual currencies at a tremendous bargain.

It should be noted that, unlike fiat currencies issued by central banks, the supply of various cryptocurrencies is limited by design. By holding their wealth in cryptocurrencies that either maintain their value or even appreciate in value over time, investors can protect themselves against the debasement of their wealth by central banks.

Source: This post is based on the article “The reasons behind the crashing crypto market” published in The Hindu on 17th June 22.

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