The state of the market for cryptocurrencies

This text is signed by David Derhymarket analyst at eToro.

The crypto asset market has been in free fall for several weeks now. The crypto market value was 2.9 trillion in November 2021 and has now fallen below 1 trillion market value (~ 850 billion at present).

But what happened then in the market for cryptocurrencies that could explain such a decline?

Between the war in Ukraine, the still uncertain health situation and the fear of too high inflation, which has caused the various central banks (with the exception of China) to raise their interest rates again, investors prefer to be cautious. The growing uncertainty and the change in monetary policy therefore had a negative impact on all markets. For a long time, we believed that cryptocurrencies were not subject to fluctuations in the traditional stock market and government monetary policy. But in recent months, we have seen cryptocurrencies behave like traditional stock markets and their valuations affected by rising interest rates and bond yields.

While Bitcoin has fallen 52.7% and Ether has fallen 67.4% since the beginning of the year, many stocks like Shopify, Zoom, Virgin Galactic, Paypal and many others are just as much in decline.

In addition to this macroeconomic uncertainty, several events have also called into question the stability of the cryptoecosystem.

First of all, at the beginning of the month, TerraLuna (the 8th largest crypto market value in April 2022) collapsed and its algorithmic stablecoin UST (the 3rd largest stablecoin in the crypto market and the 11th largest crypto market value in April 2022) completely evaporates around 50 billion in market value with it and thus causes a first panic in the crypto market.

With the fear spreading through the ecosystem, it would not be too long before the craziest rumors or the loss of peg (depeg) of certain derivative tokens like stETH (a derivative token representing ‘Ether in staking’) begins.

The Ethereum network will soon go from a Proof of Work model to a Proof of Stake model. StETH is therefore a symbol derived from ETH that allows to take advantage of effort rewards and is assumed to be equivalent and have the same price as an ETH. On the other hand, this is no longer the case at present, and a stETH = 0.95 ETH, which has affected certain players in the cryptocurrency industry exposed to this asset, such as the Celsius application.

Finally, the final cause of such a fall could be explained by the cascades of liquidations that have taken place in recent days. Several billion dollars have been liquidated in the market in recent weeks, for example, 1.15 billion were liquidated two days ago on June 13, 2022.

While there is caution in the crypto market, individuals’ enthusiasm for this technology still seems intact, and despite the bear market, which is probably not over yet, this fall may be an opportunity for investors to gather their favorite cryptos.

Despite negative results in recent months, the observation remains the same, more and more companies and key players are starting to emerge in this new innovative and volatile market, and more and more innovations are emerging.

This text is not investment advice. Do your own research and invest only the money you can afford to lose.

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