Crypto Crash Explained: In-Depth Look at Why Crypto Prices Crashed

Bitcoin

Crypto prices have had a difficult year in 2022. Bitcoin has crashed by more than 71% from its highest point in November last year. Ethereum price has moved from close to $5,000 to less than $1,000. 

In total, the market cap of all cryptocurrencies has dropped from an all-time high of $3 trillion in November to the current $860 billion. In this crypto crash explainer, I will answer the most frequently asked questions about the trend.

Crypto market cap
Crypto market cap

Why has the crypto crash happened in 2022?

Monetary policy changes

There are several reasons why cryptocurrency prices have plummeted in 2022. The most important one is the overall change in macro policies by global central banks. These changes have led to a new normal that cryptocurrency investors have not experienced before.

The Federal Reserve has embraced a more hawkish tone this year. In a bid to fight the soaring inflation, the bank has hiked interest rates by 150 basis points. It has also hinted that it will deliver more giant hikes in the coming months, 

In addition, it has started to reduce its balance sheet through a process known as quantitative tightening (QT). In other words, the bank is unwinding the policies that helped to push cryptocurrency prices sharply higher during the pandemic.

The Fed is not alone in these monetary issues. The Swiss National Bank made its first rate hike in 15 years while the Reserve Bank of Australia (RBA) made its third straight hike this week. The ECB and BOE are also tightening.

Fiscal policies

Another reason for the crypto crash is because of fiscal issues. As you recall, the American government unveiled fiscal stimulus worth trillions of dollars during the pandemic. In this period, households provided stimulus checks to millions of families. 

With most crypto prices surging, many people channeled their stimulus checks to cryptocurrencies. This year, however, the situation has changed and the government has not provided any major stimulus. As such, many people who bought coins in 2021 have started to exit their trades. And with inflation soaring, many of them have no left-over cash to speculate in cryptocurrencies. 

Terra crash

The third major reason why cryptocurrency prices have crashed is the recent crash of Terra and its ecosystem. This crash, which cost investors over $50 billion had a direct impact on crypto prices and confidence among investors. 

For one, many holders who believed in cryptocurrencies and DeFi exited their positions fearing a similar situation. Most recently, the challenges by companies like Celsius, Three Arrows Capital, BlockFi, and Voyager Digital pushed people out of crypto.

Bitcoin and US stocks correlation explained

It is worth noting that other financial assets have also declined in 2021. As shown below, the four main American indices – Nasdaq 100, S&P 500, Russell 2000, and Dow Jones – have all tumbled by more than 15%. In total, investors have lost over $9 trillion this year alone. 

As such, there is a close correlation between cryptocurrency prices and those of American stocks. This is simply because these assets are all being driven by the same factors: hawkish Fed, fiscal policies, soaring inflation, and valuation. 

Nasdaq 100 vs S&P 500 vs Russel 2000 vs Dow Jones
Nasdaq 100 vs S&P 500 vs Russel 2000 vs Dow Jones

Therefore, the close correlation between cryptocurrencies and stocks is a positive thing for the former. That’s because Bitcoin prices will also soar when stocks conclude the bearish cycle. Historically, stocks always bounce back after moving to a bear market.

When will crypto prices recover?

It is hard to pinpoint when Bitcoin and other cryptocurrency prices will recover. As of now, they remain in a strong bearish trend and any rebound provides a wonderful opportunity to go short. 

I believe that the bottom will only happen when the Fed signals that it is almost ending its hiking cycle. This will likely happen in September. At that time, the Fed is expected to have hiked rates by about 125 basis points. 

It is also worth noting that inflation is set to start easing in the third quarter. Indeed, recent data show that prices of most commodities has started dropping. This includes products like copper, natural gas, wheat, and lumber. If the downward trend continues, I expect that the Fed will slam the brakes on tightening. Doing so will lead to a bottom in stocks and cryptocurrencies.

How low will Bitcoin price go?

Sadly, I don’t have any good news for Bitcoin hodlers at this point. As you can see in the weekly chart below, we see that the BTC price formed a double-top pattern slightly above $60,000. In price action analysis, a double-top pattern is usually a bearish sign. 

Now, Bitcoin price has moved below the important chin of the double-top pattern. By measuring the distance between the chin and the double-top, we see that the potential floor for Bitcoin price will be at about $12,274, which is about 56% below the current level. 

As long-term holders recall. Bitcoin established a strong resistance between $12,000 and $13,000 in 2018. Therefore, it is logical to believe that the price will ultimately retest this price.

Bitcoin price
Bitcoin price chart

Knowing where the Bitcoin price will settle at is important because of the close correlation with other crypto prices. In most cases, other coins like Ethereum, Cardano, and Solana tend to mirror the performance of Bitcoin.

Which are the best cryptocurrencies to buy?

The current price action in the cryptocurrencies industry has a close resemblance to what happened during the dot com bubble. While many companies that existed back then went under, many of them that had strong fundamentals thrived. This includes companies like Amazon, eBay, PayPal, and Yahoo. 

The same will likely happen in the cryptocurrency crash. Many coins that don’t have solid fundamentals will likely not bounce back in the long term.

In addition to Bitcoin, other coins that I believe will bounce back in the long-term are Ethereum, Solana, Litecoin, Cosmos, Chainlink, and Monero. Each of these coins has a valid use and have a strong ecosystem behind them.

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