Cryptocurrencies are a highly volatile asset class. Intraday price fluctuations of more than 20 percent happen frequently. But even for a highly volatile asset class, the downward spiral cryptocurrencies have been in for the past six months is concerning.

Bitcoin, the largest cryptocurrency by market capitalization, hit an all-time high of roughly $69,000 in November 2021. It has lost more than 70 percent of its value in just seven months. As most other cryptocurrencies are highly correlated with Bitcoin, they have lost value as well. The entire crypto market has lost around two trillion dollars in market cap since the end of last year.

The Terra-Luna Collapse

Bitcoin started to lose value when the stock market started its sell-off cycle. Similar to tech stocks, Bitcoin also trades as a risk asset. That means in times of uncertainty, when investors need to take risks off their portfolios, they start to sell the riskiest and most liquid assets first. Bitcoin meets that definition.

What further amplified Bitcoin’s collapse was the crash of a stablecoin called TerraUSD in early May 2022. The stablecoin, which was supposed to be pegged to the US dollar, lost its peg and dropped to zero. As stablecoins are an anchor of trust and stability in the otherwise volatile crypto ecosystem, the collapse of TerraUSD caused a loss of trust and capital outflows.

Celsius Network Withheld Deposits

As the Terra-Luna collapse brought down crypto prices, crypto firms started to struggle. For example, the crypto lender Celsius network faced a liquidity crunch as depositors started to take capital off the platform. As a result, the Celsius network had to hold all deposit withdrawals from their platform in mid-June.

As other platforms also started to struggle, investors panicked and sold off more of their crypto assets. That added to the pressure and market prices started to fall further. Today, Bitcoin trades at around $20,000, and risks in the ecosystem remain high. Some expect a renewed crypto winter, while others think Bitcoin will surge again. But the truth is, nobody knows at this point.

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