As the end of the year approaches, investors are starting to reflect on their portfolios. One deduction everyone can make is that prices aren’t what they used to be. In November 2021, Bitcoin and many other cryptocurrencies soared in price, reaching unprecedented highs. Since then, the situation hasn’t been as green as we’d hoped. Everyone’s wondering what caused crypto going down in 2022.
Many contributing factors affect the crypto market and its investors. In order to fully understand the big picture, we need to explore several events that had a great effect on crypto investors in the last couple of years. Let’s dive into these topics and discover if there’s any hope left for crypto prices.
Looking Back at 2021
The year 2021 was undoubtedly fruitful not just for Bitcoin but also for many other cryptocurrencies. In fact, the combined market cap that year hit nearly $3 trillion, with hundreds of coins reaching record peaks. It was a great time for cryptocurrencies, with plenty of technological advancements.
On the other hand, we were also in the middle of the COVID pandemic. Many businesses were suffering the aftermath and therefore people were looking for alternative ways to recoup their losses. So they turned to investing in crypto.
It also didn’t help that banks were cranking up their interest rates. Investors had two choices – to put their money in the stock market or to put their money in the crypto market, and they chose the latter. The end result was a massive increase in pricing for the cryptocurrency market as demand for crypto coins and tokens grew.
Since then, the situation has been pretty dire, and if we had to talk numbers, the crypto market has reduced by nearly 65% in just two years. While it is normal to see a dip after peak times, this crypto crash caught even the biggest financial experts by surprise. So what really happened?
A Brief Look at 2022 vs 2023
Bitcoin holdings had the worst time in 2022, and as you know, when Bitcoin drops, other coins follow in a domino effect. The crypto market in 2022 dropped to almost a quarter the size of the market cap in 2021, to a staggering $790 billion.
Statistics are looking more positive in the last year, with an overall cap of $1.14 trillion and rising gradually every month. There is a huge contrast between October 2023 and October 2022, and this is pointing to positive growth in the market. Regardless, we still haven’t answered the main question – why is crypto going down? And what happened in 2022 that drastically changed the scene for investors worldwide?
The Crumbling Market Cap
There are many factors that can affect the price of cryptocurrency. In order to understand how specific events affected the crypto market, it is essential that we grasp how crypto prices are formed:
- Supply and Demand: Put simply, the more there is a demand for something, the more precious it is. Therefore, its price will rise.
- Market Sentiment: If people and society perceive crypto negatively, it has the power to change how desirable crypto assets are. Positive news can have a great impact on the market, whereas negative media coverage can scare people off.
- Regulation: Laws are a mixed bag for the crypto sector – some investors are relieved to hear that crypto will soon be regulated, whereas others are entirely against the idea.
- External Economic Factors: Other financial markets can also have an effect on crypto. Interest rate hikes, bank collapses, and high inflation reflect poorly on crypto.
- Market Liquidity: The more people are investing in crypto, the better, as this results in stable prices.
Now that you know the major factors that affect crypto’s price, you’ll begin to understand how the events we describe in the next sections impact the market.
Why Is Crypto Goin Down?
Let’s take a look at the major contributing events that can explain the price drop of digital assets in the last few years.
The US Central Bank
Many investors choose to join the crypto market to escape inflation. In fact, this is a huge problem that the US Federal Reserve has been trying to battle since the start of the pandemic. Nevertheless, inflation still has an impact, albeit not as direct, on crypto and the bitcoin price.
Simply put, when the economy is flourishing, so is the crypto sector. The opposite is also true – when investor sentiment turns negative, the crypto price suffers. The Federal Reserve made a decision to increase interest rates, which didn’t have a good effect on crypto.
The FTX Collapse
Several crypto exchanges were all over the internet in 2022. There’s hardly a person, crypto enthusiasts or not, who missed the news of the FTX collapse. The crypto exchange was one of the largest in the market and went fully bankrupt in November 2022. Its CEO, Sam Berkman-Fried, was accused of wire and banking fraud. This well-known incident had a negative impact on how crypto investors see exchanges and seriously undermined their confidence.
While FTX’s failure was notorious, it wasn’t the only event to shake trader’s trust in crypto exchanges. Recently, Binance, another prominent crypto exchange, also got itself into trouble.
The US Securities and Exchange Commission believes the business violated securities laws and mismanaged investors’ funds. Their claims resulted in a big court case, highlighting the involvement of some celebrities in the process, too.
Quite naturally, these events made things even more difficult for crypto assets. How can anyone trust the greatest exchanges in the sector if they don’t adhere to the regulations and safeguard the money of cryptocurrency investors? The only surprise in this situation is that this incident didn’t have a more significant impact on the crypto market.
So, what are investors left to do now that they can’t trust exchanges? Many turned to crypto brokers to handle their investments. Broker matching sites like Immediate Connect are currently the best option for traders. They offer help, advice, and support for traders of all levels. Powered with trading tools and customer support available 24 hours, 7 days a week, brokers make an acceptable replacement for those who don’t want to use a crypto exchange.
Regulation and Legal Developments
Cryptocurrency prices also depend on regulation. As you probably know, crypto’s biggest appeal is its decentralisation. In essence, crypto isn’t governed by a single authority. This makes digital assets cheaper and faster to transfer.
So naturally, when the European Union announced they were planning on regulating digital currencies, crypto fans weren’t particularly happy. Many believe in the freedom that crypto offers, which puts financial control in the hands of individuals.
The EU’s and US’ argument is that while the flexibility of cryptocurrency is excellent for most individuals, it can also prove convenient for terrorists. Efforts to tackle money laundering and terrorist funding are sapped when crypto remains free from tracking.
For this reason, the EU is working on creating its Markets in Crypto Assets legislation. Their main objective is to make trading, purchasing, and selling crypto traceable. Of course, many crypto fans would argue that crypto has been losing its DeFi perks ever since crypto exchanges implemented KYC procedures.
Chances are that crypto will become increasingly controlled as new laws pass in the next few years. This only raises people’s concern – that crypto is starting to resemble fiat money more and more each day.
Investors who disapprove of these proposed policies have a very high likelihood of selling their assets and moving them to the stock market, for example. This can also provide some insight into crypto going down, and attempt to give insight into the situation.
Is There a Bright Future for Crypto?
If we take a look at the past few months, we can draw some positive conclusions. Many analysts are extremely hopeful about crypto’s future in 2024. There is also proof in what they are saying, with crypto prices rising in the last few months.
Aside from the King Coin, other major cryptocurrencies like Cardano, Ethereum, Solana, and Binance Coin have all been improving. Remember that bear markets (like the one we are in) are an incredible opportunity to buy cheap assets and sell them next time they peak.
Will there be a next time? Perhaps instead of discussing crypto going down, we should focus on the future. Some financial experts predict that prices will swing upward during the next Bitcoin halving event. There has been some evidence that buyers tend to purchase more crypto around that time, as positive crypto news are circling the internet.
Still, we should take any predictions with a pinch of salt. No one could forecast the FTX collapse or events like the Terra-Luna crypto crash. And while we can view some progress in prices, it’s doubtful they will reach their fantastic peaks from November 2021 any time soon.
Many factors contributed to the enormous price drops in 2022. As you can see, the combined effects of some major events, like the FTX collapse and the central bank’s actions, had a huge impact. Of course, there were other minor incidents that were noteworthy and did not improve the situation. The crashing of Silicon Valley Bank, Silvergate Capital, Signature Bank, and the Credit Suisse bank crisis all took their toll on crypto.
The Terra-Luna crash also made things hard for crypto traders, costing them millions of dollars. Of course, this is only our take on the situation. Industry experts might have a different opinion on the topic. For now, we can focus on the positive – the market is seeing a drastic improvement. Let’s hope it keeps it up into 2024, and we don’t face any more nasty surprises.