The 2022 year has been tough for most cryptocurrencies. As a result of massive sell-offs, popular tokens have lost $2 trillion in market capitalization. However, the worst is yet to come, CNBC warns. The digital industry is entering the crypto winter which is likely to be more severe than the previous ones.
Bitcoin has plummeted by 70% this year. The flagship cryptocurrency reached an all-time high of $69,000 per coin in November 2021. Other digital tokens have been also in a downward spiral. Experts recognize that cryptocurrencies have entered a protracted bear market which is termed the crypto winter. Last time, it was recorded from 2017 until 2018.
Due to a steep downturn, the crypto market has been flooded with debt. Such market conditions set the stage for centralized lending schemes and so-called “decentralized finance.” The collapse of the algorithmic stablecoin terraUSD highlights the doom and gloom in the crypto market. The occasion triggered the domino effect across the digital sector.
Experts reckon that the recent slump in the crypto market is more prolonged than previous ones. It is unlike other downturns because the ongoing collapse consists of a series of sell-offs that entailed a brutal comedown in the whole crypto industry.
The turmoil in the crypto market this year is fueled by macroeconomic factors, including soaring inflation around the world. In this context, the Federal Reserve and other influential central banks embarked on aggressive rate hikes. The crypto market has been extremely vulnerable to broad-based monetary tightening. It is common knowledge that cryptocurrencies trade in a similar fashion as other risky assets, first and foremost stocks. The high-tech exposed Nasdaq tumbled by 22%, dragging down bitcoin and altcoins. For bitcoin, the second quarter of 2022 has been the worst of the last decade.
This year, crypto investors have been prone to open highly leveraged positions, taking advantage of new centralized lending schemes and decentralized finance (DeFi). Earlier, retail investors were provided with leverage through derivatives on cryptocurrency exchanges. So, the nature of leverage is different in the current year versus the last ones. In 2022, a lot of crypto investment funds and retail investors obtained credits. The previous schemes have become outdated, but the new ones have proven to be unsecured and inefficient.
In the last two years, experts detected a boom in yield-based DeFi and crypto “shadow banks”. Thus, the market was hit by a lot of unsecured or undercollateralized lending. In turn, it escalated lending risks that were not treated with proper vigilance. When market quotes declined in Q2 of this year, funds, lenders and others became forced sellers because of margin calls. On top of that, their failure to meet such requirements caused massive insolvencies.
A number of crypto firms opened risky bullish bets, craving for lofty yields. One of such high-profile examples is Celsius which offered investors yields of more than 18% for depositing their tokens with the firm. However, later on, Celsius had to deal with liquidity issues. The company had to halt withdrawals of clients’ funds to evade bankruptcy.
Another grave problem the crypto market encountered is heavy losses incurred by crypto miners. Most of them relied on high-powered computing equipment to settle transactions on the blockchain. A steady flow of electricity is needed to keep machines running nonstop. Recently, miners are facing sky-high electricity bills that affect cash flow. Therefore, gains of crypto market players are not enough to make up for running costs.