The recent crypto market crash had been brutal, to say the least. The $2.6 trillion market lost $1.3 trillion two weeks after the high of the market. Except for stablecoins whose values are pegged to fiat currencies, there wasn’t a single cryptocurrency in the top 100 by market capitalization which did not lose value.
Let’s delve deeper into what caused the market crash and what is the future of the crypto industry.
What was the 2021 bull run and what caused it?
The bull run is an extended period of time where cryptocurrencies are all soaring. The market sentiment is strongly bullish and positions are long. The 2021 bull run resulted in a lot of cryptocurrencies establishing new all-time highs with phenomenal growth levels. Bitcoin alone soared from a price level of $10,000 to around $60,000 – a staggering 500% increase.
Bitcoin is the original cryptocurrency. It is dubbed as the digital gold and has had a market dominance of nearly 50% for the better part of its lifetime. The king of the market holds enormous power over all cryptocurrencies. Altcoins – or alterative coins to Bitcoin – usually move in tandem with the king.
The bull runs up till now are correlated with Bitcoin block reward halving events. The first halving occurred in 2013 where Bitcoin rose from $15 to $512, followed by 2017 and finally 2020. The halving marks a drop in the hard capped supply of Bitcoin. So, it’s simple economic theory – the lesser the supply, the greater the demand and; hence, the price. In conclusion, Bitcoin halving leads to a spike in its price and Bitcoin’s hold on the whole market results in cryptocurrencies the following suit.
But what causes crypto market crash anyway?
Cryptocurrencies are highly speculative investment tools. Unlike stocks which derive value from the standing of the company, most cryptocurrencies are valued only because a major chunk of the investors believe so. However, that perspective is shifting but we will get to that later. Saying that cryptocurrencies are speculative assets do not mean that they do not possess any real value – at least the real cryptocurrencies do. The market has been flooded with cryptocurrencies especially in the bull run of 2021. With around 7000 altcoins, a good majority of those are nothing but scams.
Bitcoin halvings have historically resulted in bull runs. Bull runs cause the market to overheat with some cryptocurrencies even being overvalued and then market crash becomes imminent. As more and more people begin to panic amidst the greed in the market, sell positions surpass buy positions and the sentiment gradually turns bearish to a point that a market crash is caused.
What caused the 2021 crypto market crash?
It’s not that simple. There are a lot of factors that play a role in a market crash but investor or not everyone knows a market crash follows after a bull run.
The most evident culprit of the crash is Tesla CEO Elon Musk. Musk had been an ardent supporter of cryptocurrencies while his favorite is Dogecoin – only because it has dogs and memes while others don’t. Tesla had announced to accept Bitcoin as a mode of payment for its electric cars. Afterward, Musk had also held a poll asking whether or not to add Dogecoin as payment for Tesla. However, after all the build-up Elon Musk denounced the use of Bitcoin amidst environmental concerns – effectively causing the market to crash.
Elon Musk had been criticized greatly for the announcement as many experts pointed out the energy consumption of a proof of work mechanism is a hard fact. Moreover, a huge chunk of mining has moved to renewable sources – as believed otherwise.
The market crash was further intensified by news from China stating that the government has announced a renewal of the crackdown on Bitcoin mining in the country. The premier of the country called for tighter regulation of the crypto sphere in the country. And as China accounts for nearly 70% of the Bitcoin hashrate, any unfavorable news from the country is an immediate cause of panic.
What is the future of the cryptocurrency industry?
Is the market crash the end of the crypto industry? A big fat no! if anything, it has further brought the crypto industry under the spotlight. A report from a data analytics platform revealed that the social volume of Bitcoin has surpassed that of the 2017-2018 bull run – which is huge.
In four years, the next halving of Bitcoin can be expected which will, most probably, result in another bull-run. Yes, a market crash will follow but the five-year price projections of many cryptocurrencies place them at highs that are currently unfathomable. For example, Bitcoin is expected by Wallet Investor to have a price level of $182,164 which will become a possible price target after the next bull run.
The importance of the blockchain technology has also been realized by many. A lot of Wall Street giants and corporate behemoths that were skeptical of cryptocurrencies in the first bull run have accepted cryptocurrencies in some shape or form. Banking giants like JPMorgan & Chase, Goldman Sachs have included cryptocurrency offerings. PayPal and Mastercard have also added cryptocurrencies to their platform. Moreover, Bitcoin and other cryptocurrencies have become an integral part of corporate balance sheets with MicroStrategy, Tesla and the likes having sizeable holdings.
There has also been a paradigm shift from cryptocurrencies being used as mere assets or store of values – like Bitcoin – to the increasing focus on their value offering. Smart contract technology of Ethereum which fuels decentralized finance and apps to decentralized oracles of Chainlink are becoming increasing relevant.
Market crash or not, cryptocurrencies are not going anywhere. The decentralized and trustless offering of the technology is attractive for many. And as the globe moves toward digitization, it may become the future.