Our thoughts on the recent market correction
Cryptocurrencies will become a significant element of a digital future but it’s still an asset well-known for its volatility. However, we believe that temporary setbacks will not undermine the potential of blockchain and cryptocurrencies. Keep Tokenizing!
So instead of boring everyone with depressing statistics, let’s dive straight into the four key reasons behind the recent market ̶c̶r̶a̶s̶h̶ *correction 😉
Environmental Sustainability
In our last article, we mentioned that Bitcoin consumes more electricity than the entire UAE. Prominent figures like Janet Yellen and Elon Musk have raised concerns about the environmental impact of Bitcoin mining, with Musk’s Tesla abruptly reversing its stance on accepting Bitcoin as payment for its vehicles, citing the coin’s “rapidly increasing use of fossil fuels” as a cause for concern.
Financial markets are also starting to place emphasis on the ESG (Environmental, Social, Corporate Governance) criteria, which means that more investors are concerned with their portfolio’s impact on the environment, therefore putting cryptocurrencies under renewed scrutiny.
While Bitcoin mining has always generated fierce debate, recent tweets by the fickle Musk have only exacerbated an already volatile market, with the price of Bitcoin plunging 5% within minutes of his announcement to rescind Tesla’s decision to adopt Bitcoin payment methods.
Check out our previous Tokenize Research article, where we discuss Bitcoin’s PoW (Proof of Work) mechanism and how PoS (Proof of Stake) might be an environmentally friendlier option.
Government Regulations
Remember that cryptocurrencies are not backed by a country or a central authority. It’s decentralized with no controlling intermediary, which explains its high risk and price volatility.
Naturally, this is a cause for concern for some countries, with the Chinese government leading the way on recent crackdowns. Ironically, China accounts for nearly 70% of global mining activities, with its government intent on introducing its own “digital yuan”. The country is also said to be concerned with the environmental impact of mining activities.
The US Treasury has also called for more stringent measures to curb tax evasion risks posed by cryptocurrencies. Government agencies like the SEC (Securities Exchange Commission) and the US Treasury might soon play a significant role in cryptocurrency regulation.
Leverage and Cascading Liquidations
With an already dishwater-like market sentiment, the correction was further amplified by leverage trading — traders using borrowed capital (in cryptocurrencies) to maximize returns.
This means that when there’s a price tumble in the market, leveraged positions are at a higher risk of being liquidated.
Therefore, in the highly leveraged cryptocurrency market, where many investors are trading with borrowed capital, a significant dip in cryptocurrency prices resulted in “cascading liquidations”, or the exchanges liquidating leveraged positions to protect their downside, which then caused even more sell-offs.
The influx of Bitcoin Deposits into Exchanges
On-chain analysts, or people who provide analyses on information provided by public blockchains, are able to give investors a real-time measure of the market sentiment.
As the market went into a nose-dive, analysts indicated that whales — people who hold a large number of cryptocurrencies (enough to manipulate currency valuation) were depositing their coins into exchanges to sell. This resulted in a domino effect, with everyday investors the following suit and exacerbating the market correction.
Cryptocurrencies can be a wild roller coaster ride. It’s still arguably an infant industry, with many of the expected ups and downs (literally).
But as Cathie Wood — founder of New York-based ARK Investment Management said:
“…innovation is key to long-term growth and that technology, be it cryptocurrency and the internet before it, can’t really be stopped”
Once again… Keep Tokenizing! And hodl on. Till next week.
Here at Tokenize, we strive to provide the best possible platform for cryptocurrency trading. More importantly, we believe in sharing our passion for all things blockchain, crypto, and Defi.
Stay tuned for the next Tokenize Research articles!