Why is Crypto Crashing? The price of nearly every cryptocurrency has dropped to less than 50% of its all-time high. The reason behind the crypto crash seems to be a massive sell-off by investors, coinciding with heightened inflation fears. Despite the continued aversion to risk, investors continue to steer clear of assets with high volatility. Hence, stock markets across the globe are reflecting this trend. Meanwhile, countries all over the world continue to report high inflation numbers.
Bitcoin’s price has tumbled more than 50% six times since its launch
There’s no doubt that Bitcoin has been a flop, and the price has fallen more than 50 percent six times since it launched in 2009. But that doesn’t mean that the cryptocurrency is dead. Bitcoin has had its highs, too. In September, the price reached almost $10,000 and doubled in twelve days. A month later, it hit $1,200. On March 12, 2020, the price plunged nearly three-quarters to $4,826.
A few weeks ago, the Bitcoin community was hit with bad news. In February, an ex-Google developer named Mike Hearn declared the cryptocurrency a failure. Hearn, an influential figure in the Bitcoin community, had worked on a Java implementation of the Bitcoin protocol, bitcoinj, and was heavily involved in related projects. Ultimately, he blamed the censorship of Bitcoin’s community and the centralized mining to Chinese miners.
Volatility of the market
The volatile nature of the crypto market is nothing new. The last six months have seen a steep drop in the market’s value. It’s no surprise that cryptocurrency prices are volatile, since the technology behind them is relatively new. But the value of these assets is downstream and is affected by market volatility. The following are a few reasons why the crypto market is crashing:
The fact that the crypto industry is relatively young is a key reason for the volatile market. Because most projects are less than five years old, the market is still relatively undeveloped. Moreover, different coins are likely to have different functions, such as acting as startup equity. Because of this, they have price discovery and liquidity from the very beginning. This is an important reason why crypto prices are volatile, because it’s possible that influential people can change the market’s direction with a single tweet.
Stablecoins losing their pegs to the dollar
The USDD, a stablecoin pegged to the dollar, has been hit hard recently by the collapse of the UST. This led to reduced liquidity in the stablecoin pool and a $13.4 million hack on the Deus protocol in late April. In response to these problems, the Deus developers suspended the redemption mechanism for DEI. These actions, however, did not result in a significant drop in DEI. Nevertheless, it is still worth noting that the Deus developers are working on a repegging plan for DEI.
While USDD has a huge supply of $723 million and a total of $2 billion in collateral, it has failed to regain its peg to the dollar. Currently, Tron DAO holds enough capital to prop up USDD, but it has not recovered its peg to the dollar. Tron’s stablecoin, TRX, has also fallen in value, down 17% in just a few days.
Taxes on cryptocurrencies
Despite all of the hype surrounding cryptocurrencies, the IRS is still largely ignorant of the nature of cryptocurrency trading. The government is taxing them as capital assets, much like it does with commodities like gold. But unlike gold and other commodities, cryptocurrencies do not trade freely, and their prices tend to rise and fall rapidly. In other words, they have more characteristics of a stock than they do of a currency.
But despite this, many analysts say that the upcoming tax changes may have caused the recent plunge in the price of cryptocurrencies. Cryptocurrency is not a usable currency, and many people are buying them and selling them with no intention of using them. In addition, the IRS’ rules on taxation make them a complicated payment system. Investors should take all of this into consideration before investing in the digital assets.