Which Causes The Collapse of The Crypto Market in 2022

Prior to the crash of the Terra digital coin (token), the crypto market had been on a downward trend since the beginning of this year.

This is because investors consider that this year, global inflation is predicted to soar and make many central banks tighten their benchmark interest rate policies.

On Bitcoin, so far this year alone the price has fallen by 55.8%, according to data from CoinMarketCap. Meanwhile, from the all-time high (ATH) at US $ 69,000 which was formed in November last year, Bitcoin has fallen by around 70%

From its market capitalization, Bitcoin, which previously touched more than US$ 1 trillion in November last year, now has a much reduced market capitalization, reaching US$ 400 billion.

Not only in Bitcoin, Ethereum, the largest alternative token (alternate coin / altcoin) by market capitalization is also languishing this year.

So far this year, Ethereum has fallen by 62.35%. Meanwhile, from its ATH position of around US$ 4,800 in November 2021, Ethereum has collapsed almost 71%.

Read: This Crypto City Used To Be Worth Rp 150 T, Now Zero Remaining

From its market capitalization, Ethereum, which previously touched almost US$ 570 billion in November last year, now has a market capitalization of US$ 170 billion.

In fact, a severe correction in crypto is not new this year. Historically, the crypto market has experienced severe corrections several times, namely in 2017 and mid-2021.

But compared to the previous ones, this year's severe crypto correction is the most severe because it has an impact on many crypto companies experiencing liquidity crises

Despite its fairly high volatility, many investors are still attracted to cryptocurrencies. According to Vin Narayanan, vice president of strategy for Early Investing, when crypto adoption increases, the movement tends to be stable.

"As crypto adoption increases, it will become more stable. Until then, however, investors may want to know what to look for so they don't get burned by the crypto crash," Narayanan said, quoted by US News & World Report.

But what caused the crypto crash this year to be more severe than in 2017 and 2021, here are six causes.

1. Many Investors Use Loans

Various methods can be used by investors in crypto to get bigger and certainly faster trading profits. One of them is to use leverage.

Leverage is an investment strategy where investors use debt (loan capital) to increase the potential return on their investment.

The goal is to multiply the potential profit of a project. But on the other hand, this leverage strategy can also increase the risk of loss if the investment does not go well.

Leverage in trading both stocks and crypto occurs when a trader increases their investment position by using various instruments ranging from options contracts, futures contracts, and margin transactions. The main goal is to increase the return they can get.

With so many investors or traders using this method, the risk is even greater. Moreover, most investors in crypto are retail investors who certainly do not fully understand this method.

Based on data from quantitative crypto firm CryptoQuant, Bitcoin's leverage ratio hit an all-time high in early January, indicating that investors are taking a lot of risk in the crypto space.

However, Simon Peters, senior account manager at eToro, said that this amount of leverage could catch up with crypto volatility in the near future.

"Like other asset classes, falling prices can lead to the liquidation of long-term positions. Then, when prices fall and futures contract holders start liquidating their positions, prices can fall further. It's a cycle similar to what happened to the stock market in 1929. and 2008," said Peters, quoted by US News & World Report.

However, this type of crash is very dangerous for markets such as cryptocurrencies whose movements tend to be illiquid

2. Lack of Liquidity in the Crypto Market

The biggest problem facing the crypto market when investors taking leverage is not being able to meet their liquidity and causing a liquidity crunch.

Not all cryptocurrencies have a limited market cap and supply. There are cryptocurrencies that are very small in capitalization and unlimited in supply.

For some cryptocurrencies with small market caps, the turnover can be very small and transactions very minimal. With small funds, liquidity will be hampered and the process of selling or buying tokens will be difficult.

Therefore, this liquidity factor is very important to note if you want to buy crypto, the higher the liquidity the better, and vice versa.

Moreover, if there are investors who cannot fulfill their margin call after the investor has taken a margin position.

Margin call is a term that occurs when the broker will notify the position holder to make additional capital on the basis of margin transactions.

As in stocks, terrible things will happen if the position holder is unable to pay the margin call.

If unable to deposit funds within a certain period of time, the broker will close all positions held by investors, either selling in a long position (forced sell) or buying in a short position.

3. Unclear crypto regulations

Regulatory uncertainty is one of the main issues weighing on the willingness of investors and businesses to join the crypto market.

Crypto regulations vary widely to access different jurisdictions and countries as governments and regulators are still working to achieve a clear framework.

One example of the fall of crypto due to regulation is the case of China, where the local government had banned the use of crypto in their country

When that happens, crypto miners in China are forced to look for other places that are certainly more friendly to crypto miners.

The impact is a significant decrease in the hash rate of the network (hashrate). Hashrate is a unit of measurement for computing power in mining cryptocurrencies (mining).

Mining Bitcoin and other cryptocurrencies requires the resolution of computational problems before moving on to the cryptocurrency acquisition stage. All transactions that have been made will be stored in a place that can be accessed by the public

Miners select the required hash from various combinations, which gives access to secret keys and to new transactions.

All these complex mathematical processes require the presence of special classy tools that can assist in selecting the desired hash in the shortest possible time

4. Security still tends to be minimal

Blockchain and network security are other factors that can cause crypto crashes. Almost everything in crypto goes online, which increases the risk of theft by hackers who are rife in the internet world.

In 2021, there were more than 20 hacking cases taking place in crypto, of which the hacking cases were mostly done to steal ownership of digital assets from others.

There is at least $10 million in crypto assets from crypto exchanges or projects that were hacked. In addition, there were about six hacking cases that stole more than US$ 100 million.

Therefore, before choosing an exchange to store cryptocurrencies, potential investors are expected to do more research to find out the security, level of hacking mitigation, risk management, and insurance services if a user's crypto assets are lost.

5. There Are 'Influencers' Who Can Move Crypto Prices

Crypto can also be easily moved by parties who have great influence. For example, Elon Musk, CEO of the world's leading electric car manufacturer, Tesla Inc.

Every time Elon Musk makes a statement on his Twitter about Bitcoin or other crypto assets, the tweet can trigger turmoil in some crypto assets.

Not infrequently, the price of Bitcoin or other cryptocurrencies is easy to move because of Elon Musk's 'act'. At the end of January, he replaced the contents of his Twitter profile description with the statement "I am a Bitcoin supporter". As a result, the value of Bitcoin rose 20% shortly after he updated his Twitter profile.

Elon Musk's influence is not limited to Bitcoin alone. Previously, another crypto asset called Dogecoin also skyrocketed in price after the Tesla owner caused an uproar in the social media world.

He tweeted that Dogecoin was his favorite digital asset. This statement caused the price of Dogecoin to drastically increase by more than 100%.

It was noted that in January 2020 the price of Dogecoin was around Rp. 28 per coin. And after the statement from Elon Musk, the price soared to touch more than IDR 190.

In fact, Dogecoin which had slumped was also linked to Musk's actions. The crypto community had expected a surge in interest in Dogecoin after Elon Musk's appearance on Saturday Night Live in May 2021, the price of Dogecoin actually dropped by 34%.

Dogecoin fans simultaneously opened Twitter and streamed live via a YouTube channel devoted to watching the event. At the same time, they also track the movement of Dogecoin. Unfortunately there has been a continuous decline in the price of Dogecoin by more than 30%.

In addition to Dogecoin, there is also a token that also has a picture of a Shiba Inu dog, namely the Shiba Inu (SHIB) token, which Musk also had a chance to influence.

In October 2021, SHIB Prices are up almost 91% for 24 hours. The memecoin experienced a huge increase after Musk's tweet, even skyrocketing more than 240 percent in the last 7 days. Elon Musk just uploaded a picture of his pet Floki, a Shiba Inu puppy, on top of a Tesla car.

Based on the explanation of the facts above, it can be concluded that Elon Musk's tweets tend to have an impact on the price movements of crypto assets. However, it is worth remembering that buying and selling crypto assets based solely on the tweets of other investors (even billionaires) is not a rational investment decision.

6. Closer Correlation with Stock Market

In recent months, the movement between crypto and the stock market, especially the United States (US) stock market, has tended to go hand in hand, indicating that the two have a fairly close correlation.

 can be proven by the movement of the two which had been in line in the last few months. So, when the US stock market corrects, Bitcoin and some other cryptocurrencies also tend to correct. The opposite is also true.

Based on data from Bloomberg last May, the correlation between Bitcoin and the Nasdaq Composite index is more than 0.8 points. However, as of last June, the correlation between the two declined below 0.5, or below the position of last January

Moreover, with market risk still remaining due to high global inflation and the potential for more aggressive central banks in developed countries, the correlation between the two is even greater because these two indicators can affect the stock and crypto markets, even though in June the correlation between the two had decreased considerably.

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