The crypto market collapse was shocking. It was like a bank run, but with lines of codes instead of people crowding around a branch. The market value of the cryptocurrency luna dropped from $30 billion last week to $79 million this week. Its sister stable coin, UST, which is supposed to be equal to one U.S. dollar, fell below 37 cents on Thursday.
As of Wednesday morning, the big drops in Bitcoin prices earlier this week have stopped. Currently, “digital gold” is worth about $31,200, about 0.5 percent more than it was 24 hours ago. Even though Ethereum and Bitcoin have stabilized a bit, analysts are still wary because the stable-coin market has a lot of risks.
Both losses and gains in Crypto Market
Even with the small increase, Bitcoin is trading at a much lower price than it was a year ago. In fact, it is down nearly 50 percent from a year ago.
Bitcoin prices are down almost 34% so far this year, and they are still a long way from their all-time high, which is expected to be around $69,000 in November 2021.
In 24 hours, the price of Ethereum fell 0.7% to less than $2,350, while the price of Litecoin and Bitcoin Cash fell about 4%.
Stablecoin Risks Draw Attention
So-called “stablecoins” are a big reason why cryptocurrency markets have been going down this week. Investors in cryptocurrencies should keep an eye on the volatility of stablecoins, especially TerraUSD (UST), which is backed by Terra (LUNA). In the last 24 hours, UST was down 44%, and LUNA was down an unbelievable 92%.
Yesterday, Janet Yellen, who is in charge of the Treasury, told the Senate Banking Committee, “A stable coin called TerraUSD went through a run and lost value. I think that shows that this is a product with a lot of growth, that there are risks to financial stability, and that we need a good framework.”
Equities and crypto are now strongly linked.
Many investors in cryptocurrencies have said that Bitcoin is the new gold for the digital age and that it could be used as a safe-haven investment and a hedge against inflation.
But the way cryptocurrencies’ prices move shows that the market doesn’t seem to see these very volatile assets as safe places to keep money during times of economic uncertainty.
In the past, gold prices had gone down when stock prices went up, which has happened so far in 2022. Even though stock prices have gone down, the price of gold is up almost 3% in 2022, while S&P 500 is down about 16% this year.
Most of the selling pressure on the stock market has been caused by worries about persistently high U.S. inflation and the Fed’s possibility to take very strong steps to fight it. The consumer price index (CPI) went up 8.3% from a year ago to April. This is the highest rate of inflation in the U.S. since 1981.
The Fed raised interest rates by 50 basis points (bps) at the beginning of this month. The new target range for rates is between 75% and 1%. Fed Chair Jerome Powell said at a press conference after the announcement that the next two FOMC meetings could include another 50 bps increase.
Starting in June, the Fed will also start letting go of $30 billion in U.S. Treasurys and $17.5 billion in mortgage-backed securities. Brian Price, the senior vice president of investment management and research at Commonwealth, says that the easiest way to make money with risky assets is to sell them.
“Inflation, rising interest rates, and the war in Ukraine still get the most attention,” says price. “The market isn’t getting any big good news right now, so it’s not surprising that we’re under pressure to start the week.”
The drop in stock prices shows that investors are looking for a place to hide from the Fed’s tightening, which could hurt the economy, but they aren’t looking in the cryptocurrency market.
What You Should Know About Investing in Cryptocurrencies
People who bought Bitcoin, Ethereum, and other cryptocurrencies early on have made a lot of money. But the cryptocurrency market has a long history of being very unstable, which is not what investors want when the crypto market is uncertain. In fact, Bitcoin has had several big drops of more than 80% in its history, including a crash of about 80% in 2018.
Like most other cryptocurrencies, Bitcoin is not tied to physical assets or intellectual property, and it doesn’t generate cash flow or pay dividends or interest to investors. Experts say it’s hard to figure out what Bitcoin’s real value is because its price is only affected by supply and demand.
Warren Buffett, CEO of Berkshire Hathaway and a legendary investor, recently talked about Bitcoin’s flaws at Berkshire’s annual investor meeting. He told investors he wouldn’t pay $25 for “all of the Bitcoin in the world.”
“I don’t know if it will go up or down in the next year, five years, or ten years. But one thing I know for sure is that it doesn’t grow or make anything “he said.
Bitcoin and other cryptocurrencies might eventually stop being so volatile and stop being linked to other risky assets. Still, the recent price action on the cryptocurrency market suggests that investors may have a rough ride for a while longer.
Should You Buy When Crypto Prices Drop?
When it comes to buying when the price goes down, crypto investors should be careful. When prices drop as quickly as they have in the crypto market in the past few days, that coin you’ve been eyeing might look like a great deal.
“Never try to catch a falling knife,” says an old Wall Street proverb that fits situations like this well. Using your imagination, you should realize that “buying the dip,” or catching a falling knife, almost always ends in pain.
That doesn’t mean that smart investors can’t make quick money by trading on the market’s increased volatility. But the point here is that regular people shouldn’t jump into the market when it’s moving quickly and in big ways.