The cryptocurrency market is experiencing a real downturn. Bitcoin, the largest capitalization in the sector, collapsed overnight from Wednesday to Thursday, falling to $ 25,424. It has since recovered a bit and posted a value of $ 26,954 at. 16.10 this Thursday, a level that has not been seen since December 2020. Bitcoin has fallen 60% since its record high reached in November 2021. As is often the case, cryptocurrencies follow its path.
As a result, the total capitalization of the cryptocurrency market fell below $ 1.2 trillion according to the CoinMarketCap platform, while it had exceeded $ 3,000 billion when prices were at their highest. “Markets are booming because there is only bad news at the moment,” emphasizes Nicolas Chéron, market strategist at Zonebourse. The widening health barriers in China, the war in Ukraine and the risk of recession in several countries, including France, weigh on investor morale.
High correlation between Nasdaq and Cryptos
Above all, the monetary tightening of the US Federal Reserve and other central banks in an attempt to curb inflation is sharply reducing liquidity, which had flooded markets over the past two years. The most risky assets are the first to suffer from this development. Technology stocks, especially listed on the Nasdaq market in the United States, are thus falling. And cryptocurrencies do the same. “The correlation between the two is at a historic high,” Nicolas Chéron recalls.
“These are both the most risky sectors and those whose prices have risen the most in recent years: they therefore have the largest downside margin,” he adds.
This connection can be explained by several reasons. The bridges between cryptocurrencies and technology companies are growing, and companies like Tesla or MicroStrategy have cryptocurrencies in their treasury. And others who take advantage of these new tools, as illustrated by the Meta Group’s recent decision to integrate NFTs into its Instagram application.
In addition, institutional investors are increasingly interested in cryptocurrencies and are now betting on them as they do for Nasdaq tech stocks, occupying very similar positions. “The development of the futures market (futures, editor’s note) allows professional traders to speculate upwards and downwards on cryptocurrencies by using leverage effects,” points out Nicolas Chéron. What easily amplifies the price drop.
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The difficulties encountered by some stack coins could only have exacerbated the panic plaguing the crypto market. UST, the Terra blockchain stablecoin, has completely stalled against the dollar and is trading at just $ 0.29. However, the principle of a stablecoin is precisely to preserve the value of the currency to which it is pegged, very often the dollar, to allow investors to escape the volatility of the rest of the crypto market.
This is enough to create a crisis with investors’ confidence in the reliability and therefore the value of this technology. “This type of stablecoin (UST) called algorithmically is supported by bitcoins and other cryptocurrencies and is therefore sensitive to market volatility, unlike classic stablecoin like Tether,” explains Vincent Boy, market analyst at broker IG France.
The problem is that Tether’s USDT has also deviated slightly from the value of the dollar in recent days. “Tether is now very monitored because if it were to fall sharply, it would cause investors to sell for dollars. The project could show its limits and derail the entire cryptocurrency market,” warns Vincent Boy.
Tether Limited has repeatedly been suspected of not owning the dollar equivalent of the capitalization of its stablecoin, which today stands at $ 82 billion. “If all investors wanted to withdraw their funds and the fund did not have enough, it would create serious liquidity problems,” warns Vincent Boy.
Little hope of a marked recovery in the short term
The crypto market is therefore experiencing a real cleansing. “This capitulation is particularly healthy because it helps clean up the market,” said Jonathan Herscovici, founder of startup StackinSat, which markets bitcoin savings plans. According to him, an algorithmic stablecoin like UST is “a gas factory”, and its “own creators do not even know how it works anymore”.
“We are testing the solvency of the sector. This tumbling shows which players are covered and which are not, ”adds Nicolas Chéron.
“This crash in the cryptocurrency market is not the first and does not call into question the technological innovation that is blockchain,” Vincent Boy recalls. If the short-term outlook is negative for prices, their decline will “be able to consolidate technology and the market in the long term”, he estimates.
Bitcoin can still fall and why not go down to $ 20,000. Unless the economic and geopolitical context suddenly improves, a sharp rise in price seems unlikely in the short term. But its dives can also bring it back at more attractive prices. “The observed sharp decline may give rise to a psychological recovery, as many long-term investors should see this as an opportunity,” notes Vincent Boy. Something to reassure the holders of the cryptocurrency a bit.