ZB Shorts — May 2022 Crypto Crash

The crypto crash of May 2022 certainly isn’t the first of its kind. As a recent ZB Shorts feature discussed, Bitcoin has seen its value crash to $0.01 before — albeit nearly 11 years ago, with cryptocurrency in its infancy. However, there have been certain phenomena observed this week that have been new to the market — and they are undoubtedly watershed moments for the industry. With that said, it’s fair to now ask, where does this leave crypto?

Crypto is experiencing one of its toughest weeks on record, with even stablecoins not exempt from the forces blowing through the market. Bitcoin sits below $30k, Ethereum below $2k, and Terra — sibling to the TerraUSD stablecoin that has fallen well below its $1 peg, has seen close to 97% of its value wiped out. Total market cap is down 15%, and while any price crash provides traders with an opportunity to buy the dip, the market will have undoubtedly had its confidence dented from the happenings of recent days.

There are many factors to consider when critically analyzing the crypto market’s latest crash — some that can provide a level of calm, and others that could certainly provide panic. We have taken a look at some of these.

TerraUSD in Unprecedented Stablecoin Drop

History has demonstrated that it’s certainly not uncommon to see a price dump in crypto. For the most part, while there can be a plunge that causes plenty of blood to rush to the head, more often than not a coin will catch itself from falling before anything too drastic happens.

Amongst this, you can always bet on the stablecoins to maintain some kind of order. As stablecoins are mostly pegged to the US Dollar, they tend to float within $0.001 of $1, without any dramatic movements.

During this crypto crash however, we have seen TerraUSD, a stablecoin pegged to the US Dollar, do what most of us would consider to be the unthinkable and collapse to as low as $0.30 in value. Now stabilizing close to $0.70, TerraUSD’s sister coin Terra experienced large scale selloffs which will have undoubtedly contributed to the rapid decline of the pegged crypto. This was by no means part of the plan — not just for Terra, but crypto as an industry. The way the market responds will define the industry going forward.

Major Coins Falling Below Benchmarks

At the beginning of 2022, optimism was high for cryptocurrencies. Price records had been set across 2021, Bitcoin had pushed close to $70k, and there was a general wave of interest and enthusiasm sweeping across the industry, with newcomers arriving from all angles. Quarter one of 2022, however, was rocky for all sorts of reasons — not to mention the potential threat of a major war in Eastern Europe. Nonetheless, crypto didn’t live up to its expectations, and prices fell overall, rather than heading to the moon.

With that said, the likes of Bitcoin and Ethereum had pretty solid benchmarks that acted as, at the very least, psychological floors for their prices. Taking Ethereum as an example, it was hard to see the second most popular cryptocurrency fall beneath $3,000 heading into the new year, and while it fell to $2,500 for periods in January and February it always managed to pull itself back above this level. The story was similar for Bitcoin and $40k.

At the time of writing, Bitcoin now sits close to $27k, and Ethereum at $1.8k — even further below the newer set lower benchmarks of $30k and $2k respectively. Terra (LUNA) is also now at its lowest price in history, sitting at $0.28 after being above $80 at the beginning of the month. While such values may have seemed unthinkable even as recently as a few weeks ago, the downward trends in the market will resonate with traders.

Stock Market Influences

A major contributing factor towards the May 2022 crypto crash has been events in the US Stock Market. Losses have been felt across the market on the back of inflation rises across America, and this has undoubtedly had an adverse effect on trading. While it might not be able to solely explain how LUNA can fall close to $0.20, it can contribute to the wider debate about the volatility felt in the market — particularly when considering the comparative immaturity of the crypto market in comparison to its stock counterpart.

While of course, anything that sees crypto’s value reduce is bad for the industry, the relationship that we have observed between crypto and stocks is, all in all, a symbol of the legitimacy that crypto holds as an investment opportunity. While bad weather naturally will hit the stock market, it now hits the crypto market too, as they both have houses on the same street. In the long run, this is something that the industry should take as a vote of confidence for its long term feasibility, even in the context of such rough storms.

Looking Ahead…

While we are seeing some things happen in the crypto industry for the first time, there are some fundamentals to the market that, over time, have remained the same. While the fall of a trusted stablecoin has perked everyone’s attention, and the industry’s response to this will be defining, the sudden price fall of cryptocurrencies is not new to the industry. That doesn’t mean the industry should bat this off as nothing, but it should be viewed in context. One thing is for sure

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