According to CoinDesk, bitcoin fell as low as $22,611 on Monday. This is a drop of more than 20% from Friday and a drop of 67% from the November high of $68,991. Since November, Bitcoin’s decline has contributed to a $2 trillion market wipeout. According to data provider CoinMarketCap, the total market capitalization of cryptocurrency was around $956 billion midmorning Monday, down from nearly $3 trillion in November.
There are several obvious reasons why bitcoin is currently falling in value. For one thing, as more professional traders have entered the crypto market, its movements have become more aligned with other risk assets, such as tech stocks. Speculative assets such as cryptocurrency have fallen in tandem with inflation and central banks’ efforts to combat it through higher interest rates, a dynamic that makes risk stocks less appealing than safer assets. The US inflation index hit 8.6 percent on Friday, dragging down the stock market.
During the weekend’s turbulence in the cryptocurrency market, a widely used cryptocurrency froze customer withdrawals. Celsius Network LLC said it was halting all withdrawals, cryptocurrency swaps, and account transfers “due to extreme market conditions.” According to its website, the lender managed $11 billion in user assets as of May. Binance, a major cryptocurrency exchange, later suspended bitcoin withdrawals. At 8 a.m. ET, the company said it was a technical issue and that they would resume in 30 minutes. Withdrawals resumed shortly before noon in New York.
MicroStrategy, a Virginia-based business software company, has tied its fortunes to bitcoin, a strategy driven by company founder and CEO Michael Saylor. The company converted all of its cash reserves into bitcoin, issued debt to purchase more bitcoin, and borrowed funds to purchase even more bitcoin.
According to the company, it had 129,000 bitcoins on its balance sheet at the end of the first quarter. Almost 96,000 had not been pledged as collateral. The rest, however, may face margin calls depending on how deep the selloff goes. Mr. Saylor stated that the company has not yet received any such calls. “We do not anticipate receiving a margin call, and the company has plenty of additional collateral should we need to post more,” he wrote in an email.
Individual investors, on the other hand, have been subjected to margin calls. According to data provider CoinGlass, approximately $1 billion in collateral pledged by approximately 260,000 retail traders has been liquidated in the last 24 hours.
The renaissance in day trading during the pandemic, as well as the search for assets that could generate returns while bond yields fell to historic lows, propelled bitcoin to new highs in the fall of 2020. In November of last year, the cryptocurrency reached new highs. Since then, it has fallen 65 percent against the dollar, defying proponents’ predictions that the cryptocurrency could replace gold as a hedge against both inflation and market volatility.
“In a market selloff, risky and highly liquid cryptocurrencies are usually the first to be sold,” said Jeff Mei, chief marketing officer at blockchain technology solutions provider ChainUp. Incidents such as Celsius suspending withdrawals and the earlier collapse of the stablecoin terra USD stoke fear and create a lack of confidence in the market, according to Leah Wald, co-founder and CEO of asset manager Valkyrie Investments. It reverses the kind of unbridled enthusiasm for crypto that traders have had since 2020, a dynamic dubbed “hopium.”
“Selling is created when there is a lot of ‘hopium,’ and there has been a lot of ‘hopium’ and euphoria over projects that didn’t have much of a base behind them,” she explained. None of this should come as a surprise, she said. Crypto is following in the footsteps of other mania-driven assets, such as tech stocks in the dot-com era or silver in the days of the Hunt brothers. “At the end of the day, all assets follow the same trend,” she explained. “As much as we believe cryptocurrency is a new asset class, it is not.”