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The Crypto Crash: What Factors Are Involved And When Will It End?

Wednesday, May 11, 2022 02:22 PM | Nick Dey
The Crypto Crash: What Factors Are Involved And When Will It End?

Markets, by and large, are deep in the red this year as most stocks, cryptos, and pretty much everything else that doesn’t pertain to oil continues to fall.

This comes as uncertainty around the world mounts as persistent inflation, shortages, war, and the ongoing pandemic provide strong headwinds for jittery markets.

Facing the brunt of the consequences of these headwinds is the crypto market, which has managed to pretty much fall flat on its face throughout the year.

So What's Causing the Crash?

There is a multitude of factors that are depressing the crypto market right now, but there are a few primary factors that crypto investors should be aware of.

Inflation and the Fed’s call to action against inflation are big reasons for the decline. Despite your average crypto enthusiasts' claims that Bitcoin is an inflation hedge, the flagship crypto is falling alongside stocks and the rest of cryptos as it continues to be anything but.

To put it in numbers, Bitcoin has a 0.82 correlation with the Nasdaq and a 0.69 correlation with the ARK Innovation ETF (ARKK), which is basically a basket of high-flying tech stocks. As it stands, Bitcoin is 32.63% down from the start of the year and is 54.65% off its 52-week high.

Ethereum is having a rougher go this year, down 37.86% since January first and is 53.21% off of its high. Ethereum is also highly correlated with tech stocks. Ethereum has a correlation of 0.69 with both the Nasdaq and ARK Innovation ETF.

Somehow, the one designed to be a decentralized tech hub - and not gold - has a lower correlation with high-flying tech stocks… we’ll get into that later.

Anyways, inflation and rate hikes aside, institutions are just not as interested in cryptos after 2021 saw a wave of companies make their crypto debuts.

Further, risk appetite erodes with markets. This means the space is 1) having trouble wooing over new investors that didn’t join in on the 2021 mania and 2) seeing more risk-averse investors flee the market for cash, in order to reassess cryptos at a later date, according to Chris Kline, the co-founder of Bitcoin IRA.

When Will it End?

Cryptos had a few short-lived rallies this year, most notably when crypto investors speculated that Bitcoin and other cryptocurrencies would be widely used following the Russian invasion of Ukraine. This rally ultimately faded after research suggested that the only reason for the uptick in price and usage of Bitcoin was because of Western speculation.

If cryptos want to return to their 2021 glory, they need one of two things: either a better market for growth and speculative investments or their own catalysts that decouple it from speculative investments.

A turnaround in growth stocks feels unlikely in the short term, - due to higher interest rates, shortages, war, eroding consumer confidence, etc. - so it feels more likely that the correlation would need to change.

With NFT interest plummeting 92% since September and “metaverse” everything subsiding, the crypto market is looking for a new catalyst to bring investors on board.

One of the other short-lived rallies this year was when Ethereum made a few good strides toward adopting a Proof-of-Stake consensus method, that would allow Ethereum’s network to approve transactions in a faster, more efficient, and eco-friendly manner.

But, ultimately, this transition has been a long time coming and investors lost interest here pretty quickly as it wasn’t long before it started feeling a little slow again. News like this, despite being related to tech, is probably why Ethereum moves a little more with a mind of its own than Bitcoin.

Anyways, crypto markets have left investors wandering aimlessly, looking for bright spots in a dull, declining market.

Despite a great run during 2021, cryptos are feeling more like mist in mirrors as all of the cool things that brought people in during the pandemic continue to fall apart at the seams.

Without a real, needle moving piece of news coming out of Cryptoland, cryptos will likely continue to fall.

We said before during the reflation push, try the window test. If you - or a superhuman version of you - can’t pick up the company’s product and throw it through a window, or you can’t use the company's product to get a loan to replace the window, then it's not a reflation stock.

Well, we aren’t exactly talking about reflation anymore but cryptos may as well be. There is no tangibleness in cryptos (or not much, anyway), but there sure are a lot of supposed Bank 2.0s that say they want to make loans to everyday people.

Further, one of the biggest promises of crypto is that it can empower supply chains (and many other markets with its distributed ledger, but let's focus here). With supply chains in shambles, isn’t this the perfect market to try new technology? Yet, nobody is revolutionizing their supply chains as crypto has promised for quite some time.

This brings us to the root of the problem, regulation.

Regulation - or the lack thereof - is likely a major concern for corporations and a cause for them choosing to shy away from adopting new technology during hard times (assuming those technologies can actually add value, that is).

Recessions and hard times tend to automate a lot of jobs away, but following President Biden’s crypto executive order, crypto’s future has its head on the regulatory chopping block.

There is a lot of research going into cryptos right now by regulators, which means it's figuratively on the docket, but regulation is nowhere near being on an actual calendar of any kind, at least in the U.S.

We have maintained for a long time now that government validation of the technology would be a huge bonus for cryptos, despite the increased scope of regulation that would surely follow, but that actually assumes validation.

As companies have their back against the wall - creating the perfect opportunity for a crypto company to actually prove its worth - crypto companies have been unable to step up to the plate. This leaves crypto with no proven valid uses, besides speculation, and companies that are already working through supply-chain nightmares and worried about rising interest rates, are unwilling to risk experimenting with unproven technology.

Cryptos need regulation so companies can take on the risk of new technology - if they so please. With too much instability in the economy and the future of cryptos up in the air, news that can stop the descent will continue to be hard to come by.

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