It has been a bad year to be an investor. The Nasdaq 100 index has dropped by more than 25%, while a bond sell-off has pushed yields to the highest point in years. In addition, after surging in February, some commodities like copper and crude oil plummeted from their highs. So, in this article, I will explain why crypto is crashing and whether there is hope for a rebound.
New normal
The main reason why crypto is crashing is that investors are adapting to a new normal as the market moves to uncharted territory. The main catalyst for this new normal is the Federal Reserve. As you possibly know, investors have gotten addicted to easy money in the past decade.
In this period, the Fed has managed to maintain interest rates at a record low. It has also pumped trillions of liquidity into the market in the form of quantitative easing (QE) policies. Now, the bank has started winding down these easy money policies in a more aggressive manner.
The Fed has already raised interest rates by 75 basis points this year alone, and officials have warned that more hikes are on their way. The base case is that the Fed will hike interest rates by 100 basis points in the next two meetings. And some well-known economists are even calling for the Fed to hike rates by 100bps in a single meeting.
Therefore, crypto prices are falling as investors react to this new normal of monetary policy.
UST contagion
Another reason why crypto is crashing is that there are risks of contagion in the market because of the collapse of Terra UST. The UST collapsed this week as the coin lost its peg. Therefore, because of the size of Terra and UST, investors worry that contagion could happen. A good example of contagion in the past few years was the collapse of Lehman Brothers during the 2008 financial crisis.
Trading volume has crashed.
Additionally, crypto is crashing as the number of crypto investors and traders have declined sharply as people go back to work. For example, early this week, Coinbase reported that it lost over $400 million in the first quarter. Its volume also declined sharply in the quarter. It also signalled that its annual revenue would be lower than in 2021.
The trading volume has also eased because of a lack of stimulus. As you recall, last year, countries like the US provided trillions of dollars in stimulus. Many people pushed these funds to cryptocurrencies. However, with no stimulus and inflation soaring, demand for cryptocurrencies has declined.