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The Crash of the Crypto: Cryptocurrency Market Loses Billions

  • The cryptocurrency market has lost over $600 billion in value during the first week of May 2022
  • Bitcoin and Ethereum, the two largest cryptos, fell 24% and 31%, respectively, in value in April 2022
  • As a result of the fall of crypto, companies such as Coinbase recorded a massive loss in Q1 2022

The value of the cryptocurrency fell substantially and led to the erosion of $600 billion in digital asset market capitalization. The cryptocurrency market reported a wide-scale selloff as macroeconomic conditions have worsened. Inflation around the world has increased, as a result of which major economies have revised their interest rates. The US Federal Reserve has raised interest rates twice since March in a bid to curb the increasing inflation. The general investor response to the increase in interest rate is to unload risky assets such as cryptocurrencies. As large investors (often called crypto whales) sought to sell their cryptos, the market turned volatile, and the value fell.

The cryptocurrency market is built predominantly on the blockchain technology, it is fragmented into four major categories:

  • Proof of Work (PoW): This type of crypto relies on blockchain technology, a decentralized ledger system that facilitates transactions. Bitcoin was the first cryptocurrency to be built on blockchain technology.
  • Proof of Stake (PoS): This model of blockchain was developed to ensure secure and incentive-based transactions. Cardano, Solana, Algorand, and Tezos are some of the largest PoS cryptos based on market capitalization
  • Tokens: These are based on existing cryptocurrency systems and do not exist as a standalone payment system. Tokens can be easily described as being similar in nature to betting chips used in casinos.
  • Stablecoins: This type of cryptocurrency was introduced to ensure a reliable value for the crypto and eliminate the volatility in the market by pegging their value to one or more conventional currencies.

The Global Meltdown of Cryptos:

As fears about the global economy spread, investors have continued to sell off their digital assets. The value of cryptos from the above mentioned four categories fell considerably:

TerraUSD (UST), a stablecoin, is the tenth-largest cryptocurrency by market cap. It being a stablecoin, UST was pegged to the US Dollar, with one UST equal to nearly one USD, but a decision to uncouple the UST from the US Dollar led to a sudden crash in the value of UST, with one UST equivalent to nearly $0.17 as of 13th May 2022.

Following the decision to uncouple the TerraUSD (UST), the Terra Luna crashed 99.96% in value from its record high of $118 in April 2022 to below a cent in value on 13th May 2022. This major collapse of Luna caused TerraLabs to halt the Terra blockchain.

Shiba Inu is based on the PoW mechanism and is transitioning to the PoS mechanism with the forthcoming introduction of ETH 2.0. Shiba Inu was subject to similar volatility with more than 50% of its value being shed in a month and it was trading at $0.00001314 on 13th May 2022.

Bitcoin, the PoW-based crypto and the world’s first crypto, fell below the $30,000 mark twice in the past week. Bitcoin (BTC) dropped 55% in value from $66,971 in August 2021 to $30,366 on 13th May 2022.

The fall in the value of the cryptocurrency affected the whole of the cryptocurrency market and even cryptos pegged to the conventional currencies also reported a fall in their value.

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