AFTER a brutal week, caused by the collapse of Terra’s UST stablecoin, the cryptocurrency market appears to have stabilised for now.
A dramatic meltdown which saw Bitcoin fall below $30,000 for the first time in over a year has left investors counting their losses following the most dramatic dip in recent memory.
Bitcoin climbed back above $30,000 on Friday, hitting an intraday high of $30,921 and remains around the $30,000 mark.
The whole market is significantly down over the last week, with Bitcoin and Ethereum both seeing drops of 25 per cent.
But is the bottom in and should investors now be looking to ‘buy the dip’ or is this the beginning of another ‘crypto winter’ or even worse, a ‘crypto ice-age’?
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Why is the cryptocurrency market down?
Two reasons are believed to have caused the market to crash; moves by the US Federal Reserve to prevent high inflation and the implosion of stablecoin terraUSD.
In early 2020, the Federal Reserve cut interest rates to help manage the economic slump caused by the coronavirus pandemic.
The result of them pumping more money into households and businesses caused inflation to rise to the highest level in 40 years.
Earlier this month the Federal Reserve raised interest rates by 0.5 per cent, the largest increase in about 20 years.
The Federal Reserve is also currently reducing the supply of money to further help curb the increase in inflation and is expected to continue to hike rates in the near future.
This has made investors nervous and they appear to be moving away from cryptocurrency and towards less risky assets.
The crash is also linked to terraUSD (UST) collapsing after losing its peg to the dollar – wiping out its support coin Luna in the process.
TerraUSD is what is known as a ‘stablecoin’ – a digital currency pegged to a traditional one.
Simon Peters, crypto market analyst at trading platform eToro, said: “The concern now for cryptoasset investors is when the slide will end.
“The market is caught in the wider adversity of investment markets that are battling to decide where comfortable levels are in the wake of interest rate hikes designed to quell soaring inflation around the Western world.”
Is now the right time to ‘buy the dip’?
While the current market collapse doesn’t match the severity of the 2018 crash – where Bitcoin lost 80 per cent of its value – the fall has raised questions about whether the market has reached an expected cooling-off period – previously dubbed a crypto winter.
Yuya Hasegawa, crypto market analyst at Bitbank, said: “Bitcoin continued to slide and closed below $30,000 for the first time since last July, although the fall did not trigger a large sell off and the price is trying to recover $30,000.
“The price of Bitcoin, however, could still fall due to the UST situation and worsening technical sentiment, but if the US inflation continues to slow down, the macro environment will likely improve and the price will bottom out.”
Bank of America global crypto and digital asset strategist Alkesh Shah said: “The combined market value of the crypto sector is still much higher than it was 15 to 16 months ago.
“You have had, obviously, moves of 50 per cent during this correction, but that’s really after you had a 350 per cent move up since January of last year.”
He added: “Our sense is that by the end of this year if we start getting some regulatory clarity, that would also give enough time for a lot of macro factors to be digested.
“It’s possible that we start moving out of this range sometime over the next six to 12 months.”
One factor that could aid the markets recovery is mainstream adoption.
On Wall Street, JPMorgan Chase, Morgan Stanley and Goldman Sachs all now have cryptocurrency depertments.
Meanwhile, mainstream hedge funds, managed by the likes of Alan Howard and Paul Tudor Jones, are pouring billions into digital currencies.
The future is currently unclear but a brief ‘crypto winter’ does seem possible.
