What was behind this week's crypto market crash and why experts believe more shocks could come

The crypto market is vulnerable to wild up and down swings but for a while now it has been on a consistent downslide, with the hot trade in the currency considerable cooling off, reflecting the general financial gloom in the world currently.

Last week was a particularly horrifying descent for crypto, sending shockwaves through the market when Bitcoin, the dame of cryptocurrency, breached $20,000 early Saturday for the first time since 2020. Experts predict that Bitcoin’s boom may have hit the pause for now and if it could drop below $20,000 then more losses are expected. No one knows where the bottom is.

Bitcoin, the world’s largest cryptocurrency, was down more than 70 per cent from its highs in November when it was approaching $70,000. Ether dipped below $1,000, having sold for as much as $4,866 seven months ago, reports said.

The money-minting industry may be digging in for a long “crypto winter”, of the likes witnessed between 2018 and early 2020, experts say.

Studying the short history of the cryptocurrency market, analysts predicted the downward trajectory of the two most well-known cryptocurrencies and where they could bottom out and there analysis is - Bitcoin could go as low as $14,000-$11,000 and Ethereum could fall to the range of $750-$500.

Why the drop?

The cryptocurrency market is in the middle of a bearish sentiment cycle, which means this is a time that investors want to divest themselves off risky assets. This is owing to monetary policy tightening measures taken amid the Ukraine war that have made government securities more attractive. Rising interest rates have prompted investors to move their money to the better returns they are likely to get from government bonds.

Also, as central banks try to soak up demand to cool inflation, crypto too is experiencing a fund vacuum. There is not enough liquidity to be invested in cryptocurrency when already the risk-appetite for investors is low, so, the double setback was manifested in last week’s crypto bloodbath.

Crypto prices tank when a lot of investors decide to sell off their digital assets at the same time, lowering the value of the assets and triggering even more sell offs. Knowing the volatility of crypto, ordinary investors are selling their coins because once the market goes down, no one has any idea how far the floor is.

Other factors

There were other events that set off this domino effect across digital assets. It all began with the Luna-Terra fiasco considered by experts as the worst crypto crashes ever. This happened in May 2022 and then onward, crypto has been continuously spiralling into the abyss.

Terra Luna is now almost worthless and the panic its crash generated, pervades the crypto market still, adding to the existing pressures of inflation, a strengthening dollar and higher interest rates.

Piling on to the existing pressures, leading global crypto lender, Celsius Network, a digital asset lender, halted all transactions and withdrawals between accounts to stabilise liquidity. Another sort of a “shadow bank” called Babel Finance also froze withdrawals. To make matters worse, Coinbase, a cryptocurrency exchange, said it is laying off 18% of its workforce due to the weakening economic backdrop and the crypto crash. All of this spooked investors.

Will crypto bounce back?

Crypto believers say that it will turn around – in time – and that now would be a great time to buy the digital assets while the price is low, then sit back and watch the money grow. It will, they say, because it always has.

Crypto critics warn of misplaced exuberance in the system and expect a crypto bubble burst like the 2008 housing market collapse that triggered a global financial crisis.

However, in the near term, one can only expect more wipeout in value unless investors are somehow induced to hold their coins and other users are drawn to buy these digital assets.

But on the longest day of summer, the prospects are not sunny for crypto where winter is coming, rather, has already arrived.