09 Nov 2022 Marsha Tusk
The Crypto Market Plummeted, Here Are The Reasons Why
The crypto sector is in for yet another episode of bearish price action, as the market erased over 10 percent of its capitalization in just 24 hours.
Bitcoin, the market leader, and dominant cryptocurrency fell over 10 percent to record a low of $17,402.55 just a day after trading above the $20,000 line. The Bitcoin trend, however, is much more than an incidental fall, as the drop is evident across the entire sector.
Ethereum’s fall is even worse, losing almost 18% of its market cap in just 24 hours, while the weekly loss exceeds 20%. Almost the entire top 100 of cryptos is recording heavy losses, with Solana and Dogecoin leading the pack in seven-day performance.
Where is the problem?
One particular token, however, plummeted hard in the past 24 hours, losing over 70% of its price in just a day – the FTX token. The reason behind the drop is the concern about Binance acquiring FTX, which was seen as a bank run by specialists.
The news about Binance acquiring FTX caused panic in the FTX user base, as many expressed their concerns about an ongoing liquidity crunch. The liquidity crisis may be far bigger than expected because FTX was apparently seeking to raise $6 billion in financing to fill the gap in their balance sheet.
“One person briefed on the fundraising blitz said what started as a $1bn ask was looking more like $5bn-$6bn by midday.” market analyst Liz Hoffman noted.
Is the LUNA scenario possible?
Many crypto enthusiasts immediately drew parallels between the latest FTX market swing with LUNA’s behavior before the collapse. The now Terra Classic (LUNC) bank run and ultimate collapse of LUNA Classic impacted heavily the cryptocurrency market, sending Bitcoin into its first-ever 7-week losing streak.
The price action in the crypto sector has sent a fear signal to investors, which quickly switched their market stance and found shelter in stablecoins, as stablecoin trading volumes skyrocketed over the past 24 hours. Tether, the leading stablecoin, increased its trading volumes by 85%, many of which are inbound transactions.
Regulatory uncertainty is also a factor
Regulators and cryptos have been fighting a battle for several years, with the outcome still not certain, which makes long-term investments into riskier assets very difficult. The situation worsens as countries are still different in their crypto regulations status – some are crypto-friendly, while others have imposed market-wide bans on crypto holding and trading.
The latest turbulence in the crypto space may push regulators into implying stricter regulations in the sectors, as Germany already announcing they are looking into Coinbase’s business practices.
Are scams and Ponzis drowning the crypto market?
Another bearish aspect is the ongoing spree of crypto scams and Ponzi schemes, which provoked liquidations and repeat blows to investor confidence. The LUNA implosion, followed by the liquidity issues with Three Arrows Capital (3AC) dealt massive blows to asset prices within the crypto market. Furthermore, the implosions caused the crypto sector to shed off a large portion of its market capitalization, as when Voyager, 3AC, and Celsius collapsed, they essentially wiped out tens of billions in investor and protocol funds.
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