What Happened to Cryptocurrency & Why is it Down? - Tax Professionals Member Article By Dennis Jao
Posted by Dennis Jao

What Happened to Cryptocurrency & Why is it Down?

What Happened to Cryptocurrency & Why is it Down?

The cryptocurrency world is currently in chaos. Just a few months ago, cryptocurrency companies were everywhere during the Super Bowl, following the virtual currency surge of 2021.

Today, Bitcoin and other cryptocurrencies are in decline, and companies like Coinbase, which operates the largest cryptocurrency exchange in the United States, are announcing layoffs.


Why are cryptocurrencies falling so drastically?

Because they are influenced by the same factors influencing stocks and other activities.

Consumer prices are on the rise at their fastest annual rate in four decades, and the Federal Reserve is raising interest rates to rein in inflation.

Recently, the Fed raised rates by three-quarters of a percentage point and indicated it could raise them again by the same amount if necessary to lower prices.

Higher interest rates are making borrowing costs more expensive for individuals and businesses, raising fears of an economic downturn.

Stocks have fallen sharply from January highs, with the broad S&P 500 entering a bear market (when an index falls 20% or more from its most recent high).

Cryptocurrencies were hardly immune. Since Bitcoin (BTC) hit an all-time high in November last year (2021), the value of the most popular digital currency has fallen by around 70%, and its alts (alternative coins) are also suffering. Ethereum (ETH) is down about 70% this year, as are Solana and Dogecoin, amongst others.

Bitcoin proponents have always claimed that the digital currency would be an "inflation hedge," but they haven't.

As tech stocks crashed, so did Bitcoin's value.

This episode, this fall in cryptocurrency prices, shows that cryptocurrencies are generally speculative financial assets subject to macro-economic influences such as changes in interest rates.


So what does this mean for cryptocurrency businesses?

Precipitous declines in cryptocurrencies are putting some companies in trouble. Celsius, which takes crypto deposits from users and lends them out, has stopped withdrawing as it faces financial problems. Binance, a popular cryptocurrency exchange, halted the withdrawal of bitcoin for several hours.

The Celsius issue is damaging confidence in the broader crypto space just weeks after the collapse of a stablecoin called TerraUSD.

Cryptocurrency companies are responding by reassessing their plans for the future. Coinbase, a cryptocurrency exchange, has cut its staff by almost a fifth. In a note to the team, the company's CEO said Coinbase "has grown very quickly. Looks like we're headed for a recession."

Some cryptocurrency proponents still believe that a "crypto winter" could lead to a "crypto spring." In the past, deep recessions have led to strong growth.

Indeed, with the Federal Reserve continuing to aggressively raise interest rates and inflation remaining elevated, there is likely to be more trouble in all markets, including cryptocurrencies.


What does this mean for those who got into cryptocurrency?

It was a wake-up call for the millions of people who bought the cryptocurrency, especially if they bought it last year.

2021 was the "peak of crypto-mania." The total value of all digital currencies grew to almost $3 trillion. Cryptocurrency companies signed sponsorship deals with professional sports teams, and Coinbase, Crypto.com, eToro, and FTX paid millions of dollars to buy ads during the Super Bowl.

The message from these companies was that cryptocurrencies are the future of finance and that it is best not to miss out.

The technological marvel of cryptocurrency has stunned many retail investors who didn't realize the kind of risk they were taking.

Today, the total market capitalization of cryptocurrencies has fallen to around $1 trillion. What if you bought Bitcoin on February 14, the day after the announcement of the Super Bowl? Its value is not up to half of what you paid.


What does this mean for industry regulation?

The rise of amateur investors and the growing complexity of some cryptocurrency products have worried regulators.

Cryptocurrency markets are still relatively new, and there is a lack of clarity on even the most basic things like who is responsible for overseeing the space. Currently, SEC (the Securities and Exchange Commission) and the Commodity Futures Trading Commission (CFTC) claim to oversee parts of the cryptocurrency market.

If there is no guidance, people will be exploited, and that is something everyone wants to avoid. At the moment, we have practically nothing.

The Securities and Exchange Commission is stepping up its crackdown on cryptocurrency companies and considering new rules. Meanwhile, President Biden asked government agencies to make policy recommendations in an executive order.

And in Congress, Sen. Cynthia Lummis (R-WY) joined Sen. Kirsten Gillibrand (D-NY) on the first comprehensive cryptocurrency legislation. The bill would give the CFTC (Commodity Futures Trading Commission) more regulatory power.

For now, however, many analysts do not believe the financial system is at risk. The total market capitalization of cryptocurrencies is always lower than that of a large company like Apple.

But this recent recession has raised serious concerns.


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Dennis Jao
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