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The Cryptocurrency Market Crash

The cryptocurrency market recently went through the worst crash it has seen in over a year. With leading currencies crashing as much as 30% in less than 24 hours. The sector as a whole has lost nearly $1 trillion in the biggest drop since March 2020. The price of Bitcoin fell by almost a third at one point. Despite a later rally, Bitcoin lost around $70 billion in market value in just 24 hours. Ethereum, considered widely as much of a rival, was among the many cryptocurrencies that lost a significant amount of value that week, dropping about 28%. Reddit’s favourite, dogecoin, fell all the way down to $0.33 and further plummeting to $0.31. Other coins also followed suit, crashing as much as 63 per cent in the last seven days. In essence, crypto investors lost a whopping $830 billion in the recent blowout. The total market cap of all cryptocurrencies stands at $1.49 trillion at the moment.

Before we move into what caused this sudden downfall of the currencies, it is necessary to have a basic understanding of what the crypto market is all about. Cryptocurrencies such as Bitcoin are digital currencies not backed by real assets or tangible securities. They are traded between consenting parties with no broker and tracked on digital ledgers. Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Part of the appeal of this technology is its security. Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable. Others like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward. More than 10,000 different cryptocurrencies are traded publicly. They continue to proliferate, raising money through initial coin offerings, or ICOs.

The total value of all cryptocurrencies on May 27, 2021, was more than $1.7 trillion, down from April high of $2.2 trillion. The total value of all Bitcoins, the most popular digital currency, was pegged at about $735 billion, down from April high of $1.2 trillion. What led to this drop? It is reminiscent of 2017’s sell off, except crypto’s presence has grown a lot since then. Fluctuations are much expected, but a combination of factors contributed into this downfall coming into existence. From excitement about low-quality coins, to negative remarks from Elon Musk, to China’s latest crack down on crypto services. Tesla CEO Elon Musk tweeted that the electric vehicle maker would suspend car purchases using Bitcoin, citing environmental concerns. As much as $365.85 billion was wiped off the entire cryptocurrency market though it did pare some losses. Bitcoin, ether and XRP were all sharply lower. Every time he tweets about cryptocurrencies, the market seems to react to them. Musk said Tesla will not be selling any Bitcoin and intends to use it for transactions “as soon as mining transitions to more sustainable energy.”

Considering the fact that crypto is and remains something that sustains itself on exploited labor and resources, it fuels the same desires as capitalism, something musk and his brand thrives upon. Many technical analysts believe that Bitcoin was overbought at that point and needed a trigger to fall and correct itself. Elon Musk's tweet just acted as a catalyst for the much-anticipated correction in the crypto market. Other than that, another major event that led to this crypto collapse was that china recently banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading. It was China’s latest attempt to clamp down on what was a burgeoning digital trading market. Under the ban, such institutions, including banks and online payments channels, must not offer clients any service involving cryptocurrency, such as registration, trading, clearing and settlement. The statement also highlighted the risks of cryptocurrency trading, saying virtual currencies "are not supported by real value", their prices are easily manipulated, and trading contracts are not protected by Chinese law, as said by 3 prominent bodies - the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China.

The ascent of Bitcoin and its rivals has triggered a slew of warnings from governments and monetary authorities, who point to cryptocurrencies’ lack of any underlying value as a fundamental flaw in their design. Meanwhile, central bankers are racing to produce their own digital currencies to fill the void left by an increasingly cashless world. The question that arises before us is whether the market will recover or not. Despite the fact that Bitcoin has fallen over 30% last month, its value still remains 300% higher than last year. Extreme volatility isn't a new phenomenon but an innate characteristic of this new asset class. Volatility is what enables intense growth in the value of cryptocurrencies.

Despite another set of ‘negative headlines’ Bitcoin actually rose $2,000 over the weekend. Many hopeful investors are seeing this as a sign of recovery in the markets. To most, the cryptocurrency market represents an object of naked speculation, which consumes almost all the media coverage about the space. But to others, the crypto space is more than speculative instruments. It is the construction of a new financial system. Sometimes these market crashes are actually beneficial to investors because they're an opportunity to buy stocks at bargain prices, since crashes make them more affordable. While most people are focused on wild price swings, understanding this from a different, rather positive perspective is good. It was the traditional financial exchanges that failed investors again, not decentralised finance. Those arguing they are creating a new better financial system won the day.

~ Risika Singh


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