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Why did the cryptocurrency market lose $1trn in two months?

By Daniela Ešnerová


Updated

A business person tracking the technical movement of a stock chart on a computer screen
Studying recent developments may help understand what caused the latest crypto market crash – Photo: Shutterstock / solarseven

Last November, bitcoin (BTC) and a number of cryptocurrency altcoins reached their record highs, bringing the total crypto market capitalisation above $3trn (£2.18trn, €2.6trn) for the first time ever.

Fast forward two months, and a trillion of that has now vanished. What forces were behind this evaporation of a third of the crypto market value?
 
After a record-setting November, December was a sobering month for the crypto market. BTC fell sharply in the first weekend, which was widely attributed to coronavirus variant Omicron spooking the broader markets. However, the virtual token had already been on a downward trajectory, as seen in the chart below.

Then, as of 7 January 2022, the total crypto market value sunk below $2trn. What triggered this seemingly sudden shift, and what has been dragging the market down over the past two months?

Behind-the-scenes macro influences

The single biggest influence on the sudden change of fortunes in a market that had, up until then, thrived on the back of stimulus, was the policymakers’ change of tone – specifically, the December report on the US Federal Reserve’s Open Market Committee (FOMC) meeting.

The FOMC report signalled the shift towards a more hawkish mood, which has continued into the present moment. 

“US central bankers were unanimous in saying US rates would rise further and faster than previously anticipated, initiating selling of risk-on assets,” said Tom Rodgers, head of research at ETC Group.

ETH/USD

3,220.60 Price
+0.850% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

BCH/USD

513.30 Price
-1.620% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.50

XRP/USD

0.56 Price
-1.550% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

DOGE/USD

0.16 Price
-0.050% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

He continued: “The Fed has now admitted that inflation is not ‘transitory’ after all, [despite this being] the line it was trying to spin to sceptical markets.”

Michal Cymbalisty, founder of Domination Finance – a non-custodial, decentralised exchange for dominance trading – said: “I know it seems crazy to think about, but just 18 months ago, you could still buy bitcoin below $10,000 and ethereum [ETH] below $300. Solana [SOL] and terra [LUNA] were both less than $1. The run-up the crypto market has had since the March 2020, Covid-induced crash is nothing short of astounding. 
 
“The macro environment is likely what drew crypto down in November, December and January. The Fed has stopped printing money and an interest-rate hike was largely expected to happen in early 2022. This is usually bad news for risk-on assets such as stocks and cryptocurrencies.”
 
He concluded: “Whether that is now priced in or if we will draw lower in 2022 is [yet] to be seen. But many macro-oriented traders de-risked significantly in the fourth quarter of 2021, given the Fed approach heading into 2022. ‘Don’t fight the Fed’ really does work both ways.”

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Chart: Cryptocurrency market saw $1trn outflows in just two months

Chart showing cryptocurrency total market capitalisation over last months.Cryptocurrency total market capitalisation over last months.– Credit: TradingView

More mining bad news

When China – up until then the cryptomining capital of the world – banned mining in all its territories in May 2021, this caused BTC to crash. 

When social unrest broke in Kazakhstan, which led to deadly protests and nationwide internet outages during the first week of 2022, cryptominers were made to flee the world’s second-biggest cryptomining country, and the price of BTC tumbled yet again.

Rodgers points to “the infrastructural collapse in Kazakhstan, where around a fifth of bitcoin hashrate is located, with that price shock and the subsequent liquidation of speculative traders’ leveraged long positions,” as another reason behind outflows from the cryptocurrency market.
 
He believes that we “likely saw Kazakhstani cryptocurrency miners looking to flee the country and liquidating bitcoin they had already mined in order to finance that move.” Such a move would cause a large supply of bitcoin to hit the market at once. So when there’s a sudden increase in supply, it naturally depresses the price.

He added: “There is also a lot of speculative leverage in the riskier portions of the crypto day-trading market. With supply hitting the market and the price falling suddenly, we saw a cascade of highly leveraged long positions being liquidated – and the subsequent margin calls – and more liquidations.”

Read more: Bitcoin briefly trades above ,000 as volatility persists

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