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Comprehending the crypto crash

Investors in general have been moving away from risky assets such as cryptocurrencies as US policymakers tighten the monetary supply.

Comprehending the crypto crash
Representative Image

Raj Kapoor

CHENNAI: The extended crypto winters have been brutal to say the least, with drawdowns in May taking assets including Bitcoin more than 50% below the all-time highs they reached in 2021. May 9, this year, was a watershed date as it saw the largest crypto crash in recent memory.

So, why are markets spiralling and crashing? There are several factors that may have contributed to the latest drawdown. Investors in general have been moving away from risky assets such as cryptocurrencies as US policymakers tighten the monetary supply. That has pushed crypto prices lower, which is putting stress on institutions and other large players in the field who made investments near the top of the market. The LUNA crash has not helped either. Market sentiments have never been lower.

Crypto investing has never been for the faint-hearted. Digital assets are volatile, and fluctuations have happened before and will happen again. Though the factors driving each crypto crash are different, it is good to remember a few established investing principles.

Analysing the rapid downward trend , we find crypto’s price moves can be affected by interest rates, inflation and other macroeconomic factors that can impact how confident people feel investing their money in risky alternative assets. With interest rates rising, savings accounts become more attractive, and some people may be more comfortable putting their money where they can get predictable returns. And when prices fall rapidly as they did in the last few months that can compound the pressure on the market by forcing some investors to free up cash so they can meet other obligations.

Another important factor that drives investor pessimism re government actions by regulators around the world for as interest in cryptocurrency has grown, public officials are reckoning with what the technology might mean for monetary policy, security and the environment. China has been particularly aggressive. After the government declared cryptocurrency transactions illegal. Further, crypto markets have been bracing for action from the US government on multiple fronts. As monetary policymakers raise interest in an effort to slow inflation, the Biden administration has ordered federal agencies to develop detailed plans for crypto oversight. Developments like these are a reminder that cryptocurrency remains a relatively new technology whose full effects on the worldwide economy are not yet clear. Crypto prices are volatile, and unanticipated events can send prices downward. Closer home, lack of regulatory clarity and an imposing 30% tax… well nothing seems to stem the market spiral.

All assets have their peaks and troughs — more so with cryptocurrency because of the amount of hype and FOMO involved and the fact that people actually don’t know what it is. They buy it because they heard somebody talk about it … they are taking unmeasured risks.

But let’s look at the bear phase as an opportunity in disguise and the current corrective phase offers a great opportunity to the crypto companies to reconcile and recalibrate for the future. All financial markets are subject to bearish cycles and seasoned investors/ projects are poised to create long-term strategies to neutralise the impact of the current price dip.

(The writer is Founder, India Blockchain Alliance)

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