Losses in the crypto market: the reasons behind the Bitcoin crash

Status: 21/06/2022 13:44

The rapid decline in the value of cryptocurrencies is ringing alarm bells for many. There is talk of a crash. What are the triggers – what are the consequences? And is the crypto market threatened by a further downward spiral?

By Constantin Röse, ARD Stock Exchange Studio

It should be a big achievement for American rapper Jay-Z and Twitter founder Jack Dorsey. They actually wanted to provide free Bitcoin courses to poorer people in Brooklyn, New York to educate and impart knowledge on the subject. But after this weekend, interest should no longer be too great: The largest and oldest cryptocurrency, Bitcoin, fell by up to 14 percent to below $18,000 – the lowest level since late 2020.

Bonds more interesting again with the reversal in interest rates

Concerns in the financial markets as a whole played an important role in this development, says Sören Hettler, analyst at DZ-Bank. “There are several construction sites congregating here,” he says. “On the one hand, the significantly more restrictive central banks, which have made it clear that they will intervene in the face of the high inflation rates – with determination and higher policy rates. This is a point of concern for the crypto market.”

Private investors and large investors are pulling their money from cryptocurrencies because the actions of central banks make lower-risk investments – such as bonds – more interesting again.

Loss of confidence from homemade problems

But the downward spiral of Bitcoin, Ethereum & Co. is also homemade. For example, there is the Celsius Network, a kind of bank that also lends cryptocurrency and promises very high returns. Worried about financial difficulties, Celsius had to freeze payment transactions last week. Since then, it has no longer been possible to transfer, exchange or pay out currency. A bitter loss of trust.

You manage through big challenges, Celsius CEO Alex Mashinsky said in a short video. They now want to “stabilize liquidity”. The community is hardly reassured in the social networks. Even the head of the US Securities and Exchange Commission is urging investors to be more skeptical.

For Volker Brühl from the Center for Financial Studies at the University of Frankfurt, the Celsius case shows that the problem lies in the “lack of regulation and supervision”. Because transparency and investor protection “either didn’t work at all or only partially on such platforms, and investors are feeling it now”.

Massive value losses since the beginning of the year

Bitcoin has lost more than 60 percent of its value since the beginning of the year alone. Ethereum, the second largest cryptocurrency, even lost more than 70 percent in value. The recent crash of the Terra USD crypto project also caused turbulence – a coin that should actually provide better protection against risks. In practice it didn’t work.

There are always big ups and downs in the crypto world. Expert Brühl currently does not rule out a further downward spiral for Bitcoin & Co. “That trend can actually only be broken if many investors believe that the currencies have now reached a certain bottom, that they are fundamentally undervalued and so on, so that there is more buying interest,” says Brühl.

Implications for investors, hedge funds and El Salvador

The high losses are already having painful consequences – not only for private investors. A Singapore hedge fund is considering an emergency sale of the company’s shares.

However, the cryptocurrency crash is much more dangerous for El Salvador. Months ago, the impoverished Central American country made Bitcoin its national currency alongside the dollar and invested heavily. Now that can be a big problem.

Crypto market crash?

Constantin Röse, HR, 21/06/2022 12:14

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