The first half of May 2022 saw cryptocurrency markets caught in a whirlwind.High volatility and problems in the system worried investors.An algorithmic stablecoin ecosystem Terra, worth over $50bn at its April 2022 peak, saw a dramatic collapse.
The fall of Terra’s stablecoin,TerraUSD (UST), exacerbated weakness in investor sentiment, causing bitcoin ( BTC ) to plunge to its lowest level in over 14 months to $25,000.This was the crypto market crash of 2022.
Luna Foundation Guard, a non-profit organisation established to protect UST’s dollar peg with a bitcoin reserve, played a significant role in the recent bitcoin price crash when it sold 80,000 bitcoin in its unsuccessful attempt to repeg UST.
However, it has to be noted that the start of a global monetary tightening cycle had already sparked a gradual sell-off in risk assets, from equities to cryptocurrency.Terra’s debacle could be the writing on the wall for a long crypto winter to come.
Not all is lost.
There are many industry insiders who welcome the latest cryptocurrency crash as it takes attention away from asset price speculation and shifts focus to development within the blockchain industry.
If you are still wondering why is crypto crashing and want to learn more about the crypto price crash of 2022, this article is your one-stop shop for the latest data, news and commentary you need.
Recap: Crypto bear market of 2022
In 2021 cryptocurrency prices surged to new-highs boosted by ultra-low interest rates, growing retail investor base and increased institutional investor participation.By November 2021, BTC hit an all-time high of $68,789.
The rest of the cryptocurrency market followed suit as ether ( ETH ), the second largest cryptocurrency, breached its record high level in November 2021 to peak at $4,891.
But, 2022 has introduced a different story.
High inflation in the US and globally have forced central banks to step in to tame inflation by reducing cheap liquidity.The US Federal Reserve (Fed) has turned increasingly hawkish as it followed up a 25-basis-point rate hike in April with a 50-basis-point rate increase in May.
The withdrawal of liquidity from financial systems and markets has led to fall in the prices of risk assets.As of 16 May, BTC has fallen over 37% year-to-date to hover near $29,900.The bellwether cryptocurrency is currently over 56% down from its all-time high.
Smart contract platform leader Ethereum’s native token, ETH, is down over 46% year-to-date, hovering above the $2,000 mark, as of 16 May.ETH is about 58% below its record high at current prices.
Will crypto recover from Terra collapse?
Let’s rewind to January 2022, when the non-profit Luna Foundation Guard (LFG) was created to establish a reserve to ensure UST maintains its dollar peg.Fast forward to May 7 and LFG had amassed over 80,000 BTC and other cryptos, including BNB , AVAX , USDT , USDC , UST and LUNA in its warchest.
As UST depegged on 9 May, LFG sold its BTC reserves to support UST’s dollar peg.UST holders, who were once drawn to Terra’s passive income protocol Anchor ( ANC ) for its 20% interest rate on deposits, started withdrawing their UST deposits in a panicky exit from the Terra ecosystem.
Subsequently, Terra’s native token, LUNA, which is used as a balancing token to maintain UST’s dollar peg via a network of arbitrageurs, plunged from about $64 on 9 May to $0.0001961 by 16 May.
There were also rumours running online that well-funded market players were selling UST in the open market while shorting BTC in a planned move to profit from Terra’s collapse.
Cascading effects from the UST crisis engulfed a cryptocurrency market already weakened by difficult macro conditions.
By the end of it all, LFG’s bitcoin reserves were reduced to 313 BTC units.Terra’s LUNA crashed from being among the top 10 most valuable cryptocurrencies, with a market cap of over $40bn at its peak, to fall outside the top 200 list, with a market cap hovering over $1bn.Global crypto market capitalisation slumped over 27% since the start of the month, as of 16 May.
Has the crypto market bottomed out? According to Will Clemente, lead insight analyst at research company Blockware Intelligence, BTC prices are nearing a “generational cyclical bottom”.
Clemente added that BTC is becoming “deeply oversold”, citing various data points, including that BTC is approaching its 200-week moving average of $22,000.
Will crypto keep crashing? Macro-driven bear market
Even though Terra’s algorithmic stablecoin disaster grabbed headlines in the recent crash, this cryptocurrency bear market could be driven by global macro conditions.
What is your sentiment on BTC/USD?
Over the years, bitcoin has become increasingly correlated with equity markets due to the growing maturity of cryptocurrency markets and increased institutional investor exposure.
For an asset with the narrative of being a hedge against stock market uncertainty and fiat currency inflation, bitcoin has fallen about 37% year-to-date, as of 16 May.The tech-heavy Nasdaq Composite Index ( US100 ) has dropped over 26% in the same period.
During the Fed’s previous rate hike cycle between 2016 and 2019, cryptocurrency markets performance was hardly correlated to the stock markets.Crypto markets may be entering uncharted waters with the latest global monetary tightening cycle.
Economic think tanks at ING expect the Fed to hike rates by 50-basis-points again in July before three 25-basis-point increments by the end of 2022.
Elsewhere, digital asset manager Grayscale struck an optimistic tone in its monthly newsletter saying that Bitcoin’s on-chain fundamentals exhibited “signs of strength despite poor price performance and a difficult macroeconomic backdrop”, citing Bitcoin’s hash rate, a sign of strength in the network’s security, hitting an all-time high.
Will the bear market continue throughout 2022 and when will the crypto market go back up? These are the questions that all crypto enthusiasts are asking while crypto is crashing.Only time will tell.On a bullish note, it has to be said that, historically, crypto assets like BTC and ETH have bounced back stronger from previous crashes.
Looking forward: The Merge
Grayscale was also positive on the outlook of Ethereum as the network awaits its highly-anticipated move to become a proof-of-stake (PoS) chain in a move referred to as ‘ The Merge’ or Ethereum 2.0 .
Switzerland-based crypto investment firm Bitcoin Suisse wrote in a report :“Ethereum has embarked on an ambitious journey by performing the largest transformation of a blockchain project ever attempted.”
Bitcoin Suisse said developers expect Ethereum’s move to PoS to result in increased network security, reduced energy consumption and a drop in ETH supply issuance.
The Ethereum community has been patiently waiting for the completion of The Merge, which has been delayed several times already.
Grayscale added that the community appears “highly committed to the future of the network as the total ETH staked in preparation for the transition to proof of stake continues to increase”.
As of 16 May 2022, data showed total ETH staked stood at all-time high levels of over 12.1 million ETH, representing about 10% of ether’s total circulating supply,
Bitcoin Suisse remarked that while the tightening of ETH supply, as a result of staking, may be good for investors, it will be less beneficial for developers and users of Ethereum as gas fees become more expensive.
“Cheap gas is good for driving, not for investing in the oil industry,” Bitcoin Suisse analogised.
According to Ethereum’s website , The Merge is expected to be finalised in the second half of 2022.The Merge is likely to be the most significant development of 2022 for the crypto industry and its outcome is likely to affect the market sentiment and prices given Ethereum’s dominant position as smart contract platform leader.
The bottom line
Note that cryptocurrency markets are very volatile.Analysts’ predictions can be wrong.Whether you should buy cryptocurrencies depends on your portfolio needs and size, risk tolerance, and experience in the markets.Always conduct your own due diligence.And never invest or trade money you cannot afford to lose.
The collapse of the Terra algorithmic stablecoin ecosystem – worth over $50bn at its April 2022 peak – sparked the crypto crash of May 2022.It is now being referred to as crypto’s “Lehman Brothers” moment.
However, it has to be noted that the start of a global monetary tightening cycle had already kickstarted a gradual sell-off in risk assets, from equities to cryptocurrency..