Why did the crypto market crash?

This is one of the most important and stressful weeks in the history of cryptocurrency. As of press time, according to the Bitpush terminal data, Bitcoin fell more than 11% in a day and more than 30% in 7 days; Ethereum fell more than 20% in a day and more than 35% in 7 days, both of which fell far more than 50% from their historical highs. In addition to Bitcoin and Ethereum, the entire crypto market has a serious downward sentiment. The top ten tokens have all fallen by more than 30% in a day, and stablecoins have been decoupled for a short time. The fuse of the market collapse seems to be the decoupling of the stablecoin UST, which has caused billions of dollars of liquidity to disappear in the market. Most importantly, regulators have begun to pay closer attention to this area, leading to many negative cycles in the market.

The global economy is still reeling from the pandemic and its impact on monetary and fiscal policies. Work stoppages continue around the world, inflation in the United States has hit record highs, and job shortages remain a major problem for businesses. This has led to a sharp drop in global stock markets, with the main U.S. index, the Dow Jones, down 13% over the past six months. The technology sector has been particularly hard hit, with the tech-heavy Nasdaq index down about 30% over the past six months, representing hundreds of billions of dollars in value lost.

As cryptocurrencies become more accepted on Wall Street, they are also starting to become popular in ways that Wall Street likes. Many investors view Bitcoin and other cryptocurrencies as similar to tech stocks, so they sell off when the market performs poorly. The idea that Bitcoin is a hedge against world governments and inflation no longer looks plausible, and Bitcoin seems to be more of a speculative asset, with investors viewing it as a risky play on the future of technology. This helps explain why Bitcoin and other cryptocurrencies are experiencing a sell-off as investors turn to the safety of the U.S. dollar, but it doesn't tell the whole story.

Since the end of last week, UST, the fourth largest stablecoin by market capitalization, has experienced a serious decoupling event, with its value falling from its $1 peg to 30 cents, briefly recovering to 80 cents, and then falling to 50 cents, and it is likely to continue to oscillate back and forth for the foreseeable future. The LUNA token, which is supposed to help UST maintain its peg, has fallen from more than $100 to less than $0.1, a drop of more than 99%. Since UST is used as a currency pair for most major cryptocurrencies, its volatility has had a domino effect on the market and caused massive confusion and rampant speculation throughout the industry.

The issues associated with UST and its decoupling have caused U.S. regulators to take a closer look at the stablecoin industry. The government was already looking for a reason to intervene and impose stricter regulation on the stablecoin industry, and this regulatory action is a perfect opportunity for them to implement guidance and strict rules that stablecoins must follow. If the government is considering issuing its own central bank digital currency, then stablecoins like USDC and USDT will be direct competitors, so it is more beneficial for the government to choose to regulate them now rather than wait until they compete with the digital dollar for dominance. The concerns surrounding these potential regulations and their impact on DeFi and blockchain as a whole have worried investors and caused panic in the market.

According to Coinmarketcap data, the market value of the crypto market has fallen from a high of $3 trillion in November 2021 to $1.18 trillion today, a drop of more than 60%; it fell from $1.42 trillion to $1.18 trillion in 24 hours, a drop of nearly 17%. Many traders and investors believe that we are in the depths of a bear market. When it will end is anyone's guess, but if previous trends are to be believed , it may take years for Bitcoin and Ethereum to reach all-time highs. That being said, Ethereum's upcoming merger and the continued development and adoption of blockchain applications may be the key to this bear market ending sooner than expected.