The first cryptocurrency, Bitcoin, is still a leading indicator for the market. In November 2021, when the total market value of cryptocurrencies was near to US$3 trillion, it reached an all-time high of almost US$68,000 (£55,600). But since then, the majority of the main cryptocurrencies have declined by more than 70%, and the price of bitcoin has plunged below US$18,000.
Is this simply the next drop in the erratic cryptocurrency market, or is this the start of the end for this new category of assets?
Early in 2009, when bitcoin initially appeared, it was a novel kind of asset. Although trading was originally slow, price growth increased its worth to above $20,000 in late 2017. This occurred when more ordinary investors became interested in cryptocurrencies as an alleged safe haven or hedge against other asset classes.
Additionally, the variety of investment options expanded along with the market. A typical hedging mechanism used in other markets, such as the oil or stock market, are futures and options, which are financial contracts to purchase or sell an asset or security at a certain price or date. The Chicago Board Options Exchange issued the first bitcoin futures on a licensed exchange in December 2017. In January 2020, Bitcoin options were introduced on the Chicago Mercantile Exchange. The first bitcoin exchange-traded fund (ETF) was introduced in October 2021, giving investors access to bitcoin without the need to purchase it on a cryptocurrency exchange, capping off this phase of progress.
Rising Adoption of Crypto Market
At the same time, cryptocurrencies were becoming accepted as a valid asset class by the conventional financial industry. Seven out of ten institutional investors, according to a 2021 research, said they planned to acquire or invest in digital assets in the future. The link between the stock market and cryptocurrencies strengthened as a result of this maturity and acceptability, but this also reduced their safe-haven qualities.
In its early stages, Bitcoin was mostly unconnected from conventional financial markets. But as the industry evolved into “just another asset,” it started to experience the same macroeconomic effects that impact conventional markets. The continuing conflict in Ukraine, the following increase in oil costs, and the US Federal Reserve’s decision to increase interest rates by 0.75 percent in June to battle rising inflation have all had a negative impact on cryptocurrencies recently. Regulation efforts have also had an effect.
But this decline in cryptocurrency prices has not only been brought on by macroeconomic concerns. Stablecoin prices fell precipitously in May and June of this year, major cryptocurrency exchange Binance delayed bitcoin withdrawals because of a “stuck transaction,” while lending platform Celsius Network suspended withdrawals and transfers owing to “extreme” market circumstances.
In the midst of this upheaval, members of the open-source blockchain platform Solana apparently decided to temporarily seize control of the site’s biggest account, valued at over $20 million, in order to prevent the account owner from selling its holdings and pushing prices any lower.
Together, these elements have led to a decline in investor trust in the industry. The “severe dread” reading on the Crypto Fear & Greed Index is virtually at an all-time low of 9/100. When bitcoin hit its peak in November 2021, the index was 75/100.