It’s that stage in the market cycle where almost everyone feels defeated. Total crypto market capitalization has slumped to less than a trillion dollars, despite only being worth three times that value in November.
For many newcomers, it feels like Bitcoin is dead. No wonder the number of “Bitcoin Dead” searches on Google skyrocketed recently when BTC dropped below $20,000 for the first time in two years.
But is this really the end for crypto? Will the market bounce back anytime soon? The key to getting the answers begins with understanding why the prices of cryptocurrency assets are crashing in the first place.
Is Bitcoin Dead? Why is it Crashing in 2022?
Several factors have influenced the decline in Bitcoin and other cryptocurrencies. Let’s consider the most prominent reasons:
The Death of Terra 1.0
The Terra (LUNA) ecosystem had a TVL north of $30 billion in early May. However, several unsustainable initiatives, such as the high APY on the TerraUSD (UST) stablecoin and a broader market decline, led to Terra’s infamous collapse.
At the start of the year, the Terra network was on a Bitcoin buying spree, accumulating a lot of Bitcoin holdings. However, on May 9, Luna Foundation Guard (LFG), an organization aimed at bolstering the Terra ecosystem, sold its entire Bitcoin reserve, worth $2.2 billion at the time, to keep its stablecoin UST pegged 1:1 to the dollar.
The large BTC sale created a market panic, making it look like the end of crypto. Several investors were adversely affected by the rapid nature of the Terra implosion, triggering a bearish effect on digital assets. The Terra incident alone pulled the crypto market capitalization to $1.1 trillion, representing a 36% drop.
Global financial markets have been strained over the past few years, while uncertainty has continued to grow in 2022. Russia’s invasion of Ukraine in February led to a significant market sell-off, also affecting cryptocurrencies.
Meanwhile, central banks worldwide, including the United States Federal Reserve, have embraced newer policies to combat growing inflation concerns. These policies, including an increase in interest rates on federal funds last week, have a massive impact on risk assets, including stocks and cryptocurrencies.
Celsius Network Liquidity Issues
Celsius Network is a centralized lending platform for users to earn interest on their assets and borrow funds using crypto as collateral. Before recent developments, the platform held up to $12 billion worth of user funds under management.
First, it was rumored that the Celsius network was adversely shaken by the fall of the Terra ecosystem and the assets’ price drop. However, according to reports, Celsius denied the allegations and narrowly escaped the collapse. Over the next few weeks, the rumors intensified, leading to a mass exodus, with many of the platform’s users pulling funds from the platform.
The continued withdrawals and mismanagement issues connected with Celsius’s investments into the DeFi ecosystem led to a liquidity crisis for the platform. The lending firm eventually halted user withdrawals, spreading further panic in the crypto markets.
Celsius is yet to enable withdrawals at the time of writing, while the project’s token CEL, which had a market cap of $207 million, has suffered a steep decline. The company further exacerbated the seeming end of crypto and looks less likely to survive.
Three Arrows Capital Blow-Up
Crypto hedge fund manager Three Arrows Capital (3AC) is another company that has been immensely affected by the Terra crash and the market downtrend.
Kyle Davies, co-founder and chairman of 3AC, noted that the company invested over $200 million in a token sale by Luna Foundation Guard. Following the collapse of the Terra network, that amount is significantly down to zero.
As 3AC is still recovering from Terra’s impact, the massive sell-off of crypto assets has also rubbed off on the company. Per the report, 3AC is considered a large holder of Grayscale Bitcoin Trust (GBTC) and staked ether (stETH) tokens, of which these assets have dropped in price, thereby impacting the funds of the hedge fund company.
3AC’s insolvency came to light last week after it was unable to meet its margin calls from crypto lenders. This led to the massive liquidation of the company’s collateralized digital assets.
Towards the end of 2021, the crypto market saw a massive bull run, making it unlikely that a market crash would occur some months later.
Top cryptocurrencies saw new ATH. Bitcoin, for example, touched $68,800, while Ethereum traded above $4,800. Equally, the global crypto market saw an impressive bullish uptrend, nearly hitting $3 trillion in capitalization.
However, an insight into the price movements of crypto assets from its early days reveals that a substantial decline usually follows massive bullish price trends. Therefore, the current crypto winter is no different from other crypto crashes.
Is This the End of Crypto?
Put simply, NO. The market has seen brutal bloodbaths in the past that looked like the end of crypto. To ensure that the current bearish trends will eventually give way to the bulls, let us consider the previous crypto crashes over the years and see how they recovered.
2018 Crypto Winter
In November 2017, the crypto market began to see healthy and rapid growth, topping market capitalization. In the second week of January 2018, the market valuation, for the first time, saw an impressive height of about $830 billion, a whopping 80% increase from a few months back.
Shortly after the bull run, the market started to decline in valuation. About a month later, the market had tanked 73% of its value, bringing its valuation to $230 billion. The downtrend was continuous throughout the year, with December seeing a market valuation of $102 billion.
At the time, many people thought Bitcoin was dead, bringing the end of crypto. However, the market began to heal in 2019, as top cryptocurrencies increased in prices once again.
The Covid Crash
Following the 2019 recovery phase of the crypto market, 2020 started as a bullish season.
The bullish season, however, was short-lived as March brought the bears back into play. During the peak of the COVID-19 pandemic, the global crypto market dropped to $141 billion, a 54% decline from the previous month.
Interestingly, the market recovered almost immediately, as massive bullish trends came into play for the rest of the year.
The feat was achieved as a result of various innovations that were built on blockchain technology. In the early days of the crypto market, these use cases did not exist.
Notable Crypto Improvements Since the 2020 Crypto Crash
- Decentralized Finance (DeFi)
Decentralized Finance (DeFi) is an umbrella term for various financial solutions that are built on the blockchain. These services include lending, borrowing, trading, etc.
While a good number of these projects have been in existence for a while, 2020 saw the escalation and growth of most of these DeFi projects, such as Uniswap, PancakeSwap, Yearn Finance, and many more. These projects contributed to the last bull run.
- Non-Fungible Tokens (NFTs)
Non-fungible tokens (NFTs) are non-interchangeable digital assets where ownership is established via smart contracts in the blockchain ecosystem. They usually represent artworks, music, game collectibles, tweets, etc.
While the NFT global market saw its first $100 million cap in 2020, the market gained a lot of traction from investors the following year.
As the NFT market is a subsidiary of blockchain technology, its rich growth has rubbed off on the crypto market, as it garnered a total of $1.5 billion at the time the NFT craze started.
The 2020 to 2021 crypto market growth is also attributed to the introduction of GameFi. This is a simple combination of the words: “game” and “finance.”
GameFi enables users to play games and earn crypto tokens, NFTs, and other collectibles that can be utilized in the game and also generate revenue for players. Examples of such platforms include Axie Infinity, Binamon, etc.
Many more projects have been built on blockchain, such as move-to-earn (M2E) platforms. These trends are still in their early stages and will likely grow over time. It is noteworthy that while the bearish trend will result in the collapse of some projects, others will possibly strive and make it to the next bull season.
Conclusion: Is Bitcoin Dead?
Bitcoin is not dead, and the current bearish trend is not the end of crypto. As long as you do your necessary research and utilize the bear market to invest in a promising cryptocurrency, you will show that you are making good use of the crypto dip. In the end, you can be sure that you will be in gain when the bear season fades off. Patience is key.
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