From the past few weeks, we all have one question in mind, Why Crypto Market is Down these days?
Over the past century, the stock market has been one of the greatest wealth creators in this country. For brief periods over the past century, stocks may have been overshadowed by houses, oil, gold, or other assets, but they have consistently delivered the highest returns of any investment vehicle. Until the 1990s, when cryptocurrencies emerged.
Cryptocurrencies like Bitcoin, Ethereum, Dogecoin, and many others have paved the way for once-in-a-lifetime gains. At $64,800 a token, an investment of $155 in Bitcoin at $1 would have been worth more than $1 million. Cryptocurrencies have fallen off a cliff over the past two weeks. After a massive run higher, some would call this a natural pullback. I call it a popping bubble.
No shortage of enthusiasts believes digital currencies are the greatest thing since sliced bread, but here are 10 reasons why crypto market is down.
1. There is very little real-world utility
One of the biggest drawbacks of digital currency is that it is virtually worthless outside of cryptocurrency exchanges. The reality is that even though some high-profile organizations and companies accept Bitcoin and Dogecoin, the numbers are very small. According to Fundera, as of December 2020, approximately 1,300 businesses worldwide accept Dogecoin, while 15,174 businesses accept Bitcoin. It is estimated that there are 582 million entrepreneurs worldwide.
2. In relation to transaction data, the values made no sense
Despite the fact that valuations are highly subjective, one glance at transaction data for the three most popular cryptocurrencies, relative to payment processing giants such as Visa and Mastercard, would leave anyone speechless.
On their respective blockchains, Bitcoin, Ethereum, and Dogecoin process in the neighborhood of 300,000, 1.4 million, and 50,000 transactions per day, respectively. The combined processing power of all the major cryptos cannot compare with Visa or Mastercard, yet the Big Three of crypto have a higher combined market value than Visa and Mastercard. It doesn’t make sense.
3. It has taken businesses a long time to adopt blockchain
Blockchain sounds great on paper. From a financial perspective, it’s a way to expedite the validation and settlement of payments. In place of waiting up to a week for cross-border payments to settle, they could be resolved within seconds or minutes. Non-financial applications are also possible with blockchain. Ethereum’s smart contract-driven blockchain could unlock supply chain bottlenecks one day.
However, what sounds great on paper doesn’t always translate into success in the real world. There is still a Catch-22 with blockchain. Businesses won’t adopt it until it has been proven on a broad scale, but they won’t abandon their existing (and proven) infrastructure to effectively be the guinea pig. Big business will keep its distance from blockchain until it matures.
4. There are virtually no barriers to entry
Apart from its minimal utility, my biggest complaint about crypto is its lack of barrier to entry. The development of a blockchain and, potentially, a tethered token is possible by anyone who has the time to code. CoinMarketCap reports that it has almost 10,000 different cryptocurrencies in its system. While many don’t trade much, if at all, that’s an insane number of potential competitors for Bitcoin, Dogecoin, and Ethereum, with much more likely to follow.
There is an endless amount of competition in the crypto space, which is continually diluting it.
5. The problem of centralization persists
Cryptocurrencies aim to decentralize. This is to prevent one person or a small group of people from controlling a network. Yet Bitcoin and Dogecoin are largely centralized. Almost 42% of all Bitcoin is owned by just 2,155 addresses, while 66.6% of all outstanding Dogecoin is owned by only 99 addresses. Perhaps people are realizing that these financial experiments aren’t as decentralized as they were intended to be.
6. Elon Musk is tugging at the heartstrings
Another reason why the crypto bubble bursts are because it is artificially influenced by tweets from Tesla CEO Elon Musk. In the beginning, Musk embraced Bitcoin wholeheartedly. In February, he bought $1.5 billion worth of Bitcoin for Tesla’s balance sheet. A month later, he announced that the company would accept Bitcoin for electric vehicle purchases. Following 49 days, he tweeted that Tesla would no longer accept Bitcoin due to its adverse environmental impact. Then he turned his attention to Dogecoin.
In my opinion, the fact that tweets with little to no substance are creating and erasing hundreds of billions of dollars in crypto market value indicates that a bubble has been brewing for some time.
7. Governments are not all on board with cryptography
As well as the crypto bubble popping, some governments are not comfortable with cryptocurrencies undermining their central bank-backed currencies. The crypto market sent into a tailspin after China banned banks and online payment channels from offering services related to cryptocurrencies. Although a lot of Bitcoin mining takes place in China.
China is far from alone. The Turkish government recently banned crypto payments. A number of countries have effectively banned digital currencies, including Bolivia, Ecuador, Nigeria, and Algeria. The global use case for crypto unlikely given this trend.
8. Correlations in real life cannot identified
In addition, crypto has no readily identifiable correlations in the real world. A common example is an inverse relationship between gold and the U.S. dollar. Gold is very likely to rise in value when the dollar is declining.
These correlations do not exist for Bitcoin, Ethereum, and Dogecoin. In addition to pointing out how crypto protects against inflation, enthusiasts forget that bitcoins have fluctuated as the money supply expanded. Due to the absence of real-world correlations, cryptocurrency driven by emotion and technical analysis.
9. Leverage haunts the crypto market
Overleveraged investors can also blame for the cryptocurrency collapse. The most popular crypto exchanges allow customers to leverage their account equity 50 to 125 times. This is not an uncommon form of leverage in forex, where currencies move in fractions of a cent, but it is absurd for crypto, which can move 3% in seconds.
On May 19, leverage-based margin calls liquidated over 887,000 accounts totaling $9.4 billion in crypto assets. With this insane leverage, the crypto market is prone to fast downturns.
10. Investing in new technology always overhyped
Lastly, investors tend to overestimate the adoption of new technology. It has been more than a half-decade and the blockchain buzz hasn’t materialized into meaningful enterprise adoption. As with any new technology, crypto will take time to mature. That is one of the reasons Why the Crypto Market is Down.
Also Read: Cryptocurrency Historical Crashes: Lessons Learned from Bitcoin Crash 2021