The queen of cryptocurrencies has just fallen below the $25,000 mark, plunging to its lowest level since the end of 2020.
The cryptocurrency market has been in free fall since this weekend, amid strong economic tensions and tightening monetary policies.
As of this writing, the king of cryptocurrencies, bitcoin, has fallen 10% since Sunday, trading below $25,000. This is the lowest level since December 2020. The asset has lost 65% of its value compared to its all-time high last November at $69,000. Even a month ago, during the crypto market crash, bitcoin had not fallen below $26,000.
This low level is part of a tense economic context: last week, the United States announced that it was experiencing its strongest price hike in 40 years, with inflation rising by 8.6% over one year.
How to explain such a fall?
For several months, the cryptocurrency market has been increasingly correlated to the Nasdaq, the American technology index. This Monday, in a gloomy economic context, the Nasdaq fell by more than 3.5%, which may in particular explain a fall in the cryptocurrency market.
While the cryptocurrency market (bitcoin and other cryptocurrencies combined) is much smaller – with a current capitalization of just under $1 trillion – than the Nasdaq, a drop in the tech index is felt more significantly in this market. If paradoxically, the correlation between bitcoin and the Nasdaq was not observed in the first days of the war in Ukraine, it has resumed in intensity since the beginning of March.
Tech stocks and cryptocurrencies are among the most sensitive assets to central bank policies, including the US central bank (the Fed). Overall, over the years 2020 and 2021, there was strong liquidity in the markets injected by central banks to support economies in the midst of a pandemic.
This caused the cryptocurrency and Nasdaq market to rise as well as other risky assets. But the year 2022 is different and the economic context has changed: recently, the American central bank had notably raised its rates to fight against inflation. Faced with the tightening of monetary policy by the US central bank, investments in the riskiest assets are down. There is less money circulating in the financial markets, and this penalizes the Nasdaq and cryptocurrencies.
In general, the cryptocurrency market being smaller (1000 billion capitalization) than the Nasdaq (19.276 billion according to Factset), it is also subject to more volatility. A decline in the Nasdaq thus tends to result in an even sharper fall in the cryptocurrency market.
Other cryptocurrencies and stablecoins fall, companies in turmoil
In this context of the fall of bitcoin, the ten cryptocurrencies with the highest market capitalization according to coinmarketcap fall, like the second cryptocurrency in terms of capitalization, ether. It has plunged more than 17% since Sunday, trading at the time of writing around $1,200. Similarly, solana cryptocurrency drops 20% and dogecoin drops 18%.
In addition, a phenomenon that we observed a month ago with the crypto-crash has resurfaced: the destabilization of certain stablecoins. A month ago, the Terra blockchain’s terra usd (UST) crashed, losing its peg against the dollar. This Monday, two new stablecoins have just lost their peg against the dollar: the USDD and the USDN.
As a reminder, a stablecoin (or stable cryptocurrency) is a crypto-asset (or digital asset) that is pegged to a fiduciary currency such as the euro or the dollar. A stablecoin can also be backed by other assets (such as gold). This is called the underlying of the stablecoin.
When the price of the underlying goes up or down, the value of the stablecoin must align with it. The promise is to permanently maintain the parity, for example 1 UST = 1 dollar. This peg to a currency is also called a “peg”. When there is a gap between the value of the underlying and that of the stablecoin, it is called a “de-peg” or “loss of parity”.
In this context of a new fall in the cryptocurrency market, companies that ran a liquidity risk find themselves in turmoil. This is particularly the case of the Celsius company. The American staking and lending giant announced on Monday to its customers that they could no longer transfer or receive their funds in cryptocurrencies.