Why Many Crypto Assets Are Falling

2022-07-08, 10:48

[TL; DR]

Crypto assets are digital assets that utilize cryptography and function with distributed ledger technology.

Crypto assets can be categorized into eight types: payment currencies, blockchain economies, privacy coins, stable coins, utility coins, security coins, Non-fungible tokens (NFTs), and Decentralized Finance (DeFi).

All cryptocurrencies are crypto assets, but not all crypto assets are cryptocurrencies.

A significant feature of crypto assets is their volatility; many high and low cycles often happen in quick succession.

Lately, crypto assets have seen a downturn in value as their prices seem to be in free fall.

Bitcoin has dropped by more than 60% within seven months, Ethereum is currently 76% below its all-time high, and NFTs sales have plummeted by over a 100% since April.

Territorial conflicts, inflationary fears, and increased interest rates are some of the reasons why crypto assets have seen a reduction in their value.

There is no gainsaying that the crypto world is undergoing a dry spell globally. Crypto assets are hitting all-time lows, and many are far off their all-time highs.

In financial parlance, this period is termed a “bear market,” and bear markets are known to last almost a year, unsurprisingly the duration of this drop in value.

The value of crypto assets has plummeted so severely that the prices of these digital assets seem to be in a state of free fall periodically.

We will delve into why this is happening, but we must understand what crypto assets are before we do.

What Are Crypto assets?

Image: wirex

Crypto assets are digital assets that rely predominantly on cryptographic techniques and distributed ledger technology for their usage.

The first-ever crypto asset was Bitcoin, a cryptocurrency that emerged more than a decade ago. It soon became the most valuable crypto asset, with its value reaching almost $70,000 in 2021 before it unceremoniously tanked a few months after.

With time and more innovation in the technology world, the types of crypto assets have increased exponentially.

Let's take a look at them.

Types of Crypto assets

There are eight main types of crypto assets;

Payment currencies
These currencies are used as payment mediums for transactions. They are commonly referred to as “cryptocurrencies.”

They are digital currencies that use blockchain technology to protect, regulate and validate funds transferred between parties.

Common ones include Bitcoin, Dogecoin, Litecoin, Ripple, etc.

Blockchain economies
These are platforms that are invested in the technical aspect of blockchain technology.

For example, with Ethereum, there is the formulation of decentralized tokens and apps, while Cardano improves on this to be more scalable and interoperable.

Privacy coins
As the name suggests, this crypto asset keeps transactional information safeguarded from the public via encryption.

The identities of the privacy coin owners, their wallet balance, and any amount, sent or received are only known by both parties involved.

Some examples are Monero and DASH.

Utility tokens
They perform a specific role within a blockchain ecosystem. Basic Attention Token (BAT), for instance, was developed to enhance the efficacy of digital promotion through its blockchain-based Brave browser.

Stable coins
These coins always possess a stable value. Tether (USDT), the coin version of the US dollar, is the most prominent example.

Security tokens
They are digital assets symbolizing ownership or a stake in a blockchain project that transfers value from an investment to a token.

The premier security token globally was Blockchain Capital (BCAP), launched in 2017.

Non-fungible tokens (NFTs)
NFTs are digital assets that are stored on a blockchain platform. It can exist in different forms like art, music, video game pieces, GIFs, memes, collectibles, etc.

The name “non-fungible” means it can't be duplicated as only one particular version of the item exists. Thus, its price is determined by rarity.

Decentralized Finance (DeFi)
DeFi deals with enabling decentralized financial services for easy use.

Ethereum network is the most utilized platform, and it allows the exchange of tokens, lending, and borrowing, staking, yield farming, etc., while Chainlink (LINK) is a prominent DeFi token.

Crypto assets come in different forms, but all function with distributed ledger technology (blockchain).

While it came into the limelight in the 2010s, many crypto-assets generally hit new peaks in this decade.

Bitcoin rose to an all-time high of $68,000 in 2021; Ethereum’s token, Ether, also hit its all-time high of $4,800 the same year; the most expensive NFT (Pak’s The Merge) got sold for $91.8m in late 2021; security and utility tokens both launched in 2017, etc.

With such breakthroughs recorded within that time frame, one would expect crypto-assets to keep soaring in value and breaking boundaries in the financial world.

Instead, the reverse is the case as the prices of crypto assets have been dropping and are now seemingly in a state of free fall.

The cumulative market capitalization of digital assets lost over $300 billion within a few days, with substantial losses in tokens such as Solana’s SOL, DeFi-play Avalanche’s AVAX token, Dogecoin, Shiba Inu, and meme coins.

Bitcoin has dropped by more than 60% within seven months to the extent that it hit $18,000, a far cry from its all-time high of $69,000. Ethereum is currently 76% below its all-time high, trading at $1,217 when it previously hit $4,800. NFTs sales have tumbled by over a 100% since April. Tron’s USD stablecoin fell off its $1 peg.

These losses also affected others differently, as crypto lenders Crypto.com and BlockFi had to lay off some of their workers.

You may then wonder, why are crypto-assets falling?

Why Are Crypto Assets Falling?

We’ve already established that crypto assets are currently falling. It is so bad that the collective market capitalization of all cryptocurrencies has receded below a trillion dollars.

Here are some reasons that might shed light on why this is happening:

US Federal Reserve Laws
The US Federal Reserve had to tighten monetary policy forcefully to combat inflation, which reached its highest level in 40 years.

The COVID 19 pandemic caused inflation to rise to 8.5%, and the Feds tried to control it by increasing interest rates by 0.5%.

The hike in the Fed rate affected crypto prices and the crypto market at large as there was less money in circulation which made investors wary of purchasing crypto assets.

Territorial War
Before Russia invaded Ukraine, Ukraine was fourth on the global list of crypto holders.

When the war started, the Ukrainian citizens had to withdraw fiat in excess and transfer their savings to other currencies.

The Ukrainian government solicited crypto donations and set up a wallet for it but temporarily banned it as too much Ukrainian money was being transferred out of the country, which could devalue their currency.

Celsius Network Crash
Celsius network moved to forgo withdrawals, swaps, and transfers between accounts due to “extreme market conditions.”

This generated a lot of uproar and panic amongst investors, which led to the value of crypto falling.

Conclusion

It is the nature of the crypto market to be bullish and bearish, to rise and fall, and there have been many instances of this in the past.

However, the current crypto slump is unprecedented, and even if the events above didn't occur, crypto might still have tanked, but they played starring roles in it.

Author: Valentine A., Gate.io Researcher
This article represents only the researcher's views and does not constitute investment suggestions.
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