August 19, 2022

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What’s behind the cryptocurrency selloff

Over the last week, numerous cryptocurrencies have seen prices plunge. As of last week, 40% of bitcoin investors were underwater on their investments, according to data from crypto intelligence firm Glassnode.

Bitcoin, which is the largest cryptocurrency by market cap, has its lost half its value over the last few weeks. Last Thursday, May 12, the price of a bitcoin fell to around $25,400. The coin was at an all-time high in November of nearly $69,000.

As of Monday morning, the coin has recovered slightly, sitting right near $30,000.

“The fear factor is high in crypto markets right now,” says Kate Rooney, CNBC’s technology reporter, who covers cryptocurrency. “The bulk of newer investors have lost money in crypto markets and may be looking to cut their losses.”

Here’s what’s behind the recent losses in the cryptocurrency market.

Bitcoin is tied to the broader U.S. stock market

Stocks, bonds, and other assets have been losing value in recent weeks. To fight historic inflation, the Federal Reserve has been hiking interest rates, and may need to do so more aggressively. As prices for goods and products remain high, and as the stock market selloff continues, some market watchers are concerned about a potential recession.

“Bitcoin is broadly still trading like a high-growth tech stock, so what’s happening in broader markets is still the main driver of prices,” Rooney says.

The correlation between cryptocurrency and stock prices may seem a little confusing, since the whole theory behind crypto is decentralization. But since many stock market investors own cryptocurrency as a way to diversify their portfolios, as investors sell stocks and other traditional assets, they’ve been selling crypto, too.

Given the currency stock market environment, as well as other factors, “crypto trading activity has been on pause from both larger ‘whale’ investors and smaller buyers,” Rooney says.

Some stablecoins are destabilizing, worrying investors

Stablecoins are a class of cryptocurrency set up, in theory, to limit extreme price swings because they’re intended to be tied to external assets, such as the U.S. dollar or gold. They still use blockchain technology to facilitate transactions.

A stablecoin called TerraUSD, or UST, is supposed to be pegged one-to-one with the U.S. dollar, meaning theoretically, 1 TerraUSD should equal $1 U.S. dollar. UST has however lost its peg and on Monday it was trading at just 9 cents, according to CoinGecko data.

Bitcoin is broadly still trading like a high-growth tech stock.

Kate Rooney

Tech reporter, CNBC

Other stablecoins under the Terra family have seen their prices fall, too, which has had an impact on the broader cryptocurrency markets. “The company behind that project held billions of dollars worth of bitcoin and sold that into the open market,” Rooney says.

Overall, the collapse of Terra’s tokens wiped out more than $200 billion of wealth in a single day.

“The whole unraveling was seen as a threat to bitcoin prices and a blow to investor sentiment,” Rooney says.

To reduce your risk, ‘diversify and don’t over-leverage’

If you’re a crypto investor, this may seem like a scary time. “We would recommend to our clients who have been heavily affected by this market crash to remember to be kind to themselves,” says Chris Brooks, co-founder of CryptoAssetRecovery.com. “Know that while this is a setback, it’s a temporary one.”

Stay diversified, Brooks suggests, and keep your crypto assets safe: “Someday when you’re telling the story of this week, you’ll find a silver lining. Employ best practices in securing your private keys, diversify, and don’t over-leverage yourself. Eventually, trust [may] re-enter the market and you’ll get another shot.”

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

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https://grow.acorns.com/whats-behind-the-cryptocurrency-selloff/