The collapse of Bitcoin and cryptocurrency can clean up the ecosystem

The cryptocurrency market is experiencing a real crisis. Bitcoin, the largest capitalization in the industry, plummeted overnight Wednesday through Thursday, dropping to $ 25,424. It has since recovered slightly and recorded a value of $ 26,954 at 4:10 pm this Thursday, a level that has not been seen since December 2020. Bitcoin has fallen 60% from its all-time high reached in November 2021. As often , the cryptos follows its trajectory.

As a result, the overall cryptocurrency market capitalization fell below $ 1.2 trillion, according to the CoinMarketCap platform, while it had surpassed $ 3 trillion when prices were at their peak. “The markets are concerned because there is only bad news at the moment,” emphasizes Nicolas Chéron, market strategist at Zonebourse. The extension of medical confinements in China, the war in Ukraine and the risks of recession in several countries, including France, are weighing on investor morale.

High correlation between Nasdaq and cryptocurrencies

Above all, monetary tightening by the US Federal Reserve and other central banks in an effort to curb inflation is drastically reducing liquidity, which has flooded markets over the past two years. The riskiest assets are the first to suffer from this evolution. Therefore, technology stocks, listed in particular on the Nasdaq market in the United States, are down. And cryptocurrencies do the same. “The correlation between the two is at an all-time high,” recalls Nicolas Chéron.

“These are both the riskiest sectors and those whose prices have risen the most in recent years: they therefore have the largest downside margin,” he adds.

This correlation can be explained by several reasons. The bridges between cryptocurrencies and tech companies are growing, with companies like Tesla or MicroStrategy having cryptocurrencies in their treasury. And others who are taking advantage of these new tools, as illustrated by the Meta group’s recent decision to integrate NFTs into its Instagram application.

Furthermore, institutional investors are increasingly interested in cryptocurrencies and are now betting on them as they do for Nasdaq tech stocks, taking very similar positions. “The development of the futures market (futures, ed) allows professional traders to speculate up and down on cryptocurrencies, taking advantage of the leverage effects”, emphasizes Nicolas Chéron. What easily amplifies the price drop.

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Stablecoin warning

The difficulties encountered by some stablecoins could only aggravate the panic that is afflicting the cryptocurrency market. UST, Terra’s blockchain stablecoin, has stalled completely against the dollar, trading at just $ 0.29. However, the principle of a stablecoin is precisely to preserve the value of the currency to which it is anchored, very often the dollar, to allow investors to escape the volatility of the rest of the cryptocurrency market.

Enough to create a crisis of investor confidence in the reliability and therefore in the value of this technology. “This type of stablecoin (the FSO) called algorithmic is supported by bitcoin and other cryptocurrencies and is therefore sensitive to market volatility, unlike classic stablecoins such as Tether,” explains Vincent Boy, market analyst at broker IG France.

The problem is that Tether’s USDT has also diverged slightly from the value of the dollar in recent days. “Tether is now heavily monitored because if it were to drop sharply it would lead investors to sell for dollars. The project could show its limits and derail the entire cryptocurrency market, “warns Vincent Boy.

Tether Limited has repeatedly been suspected of not owning the dollar equivalent of its stablecoin capitalization, which now stands at $ 82 billion. “If all investors wanted to withdraw their funds and the foundation didn’t have enough, it would cause serious liquidity problems,” warns Vincent Boy.

Little hope of a significant rebound in the near term

The cryptocurrency market is therefore experiencing a real purge. “This capitulation is particularly healthy because it helps purify the market,” says Jonathan Herscovici, founder of the start-up StackinSat, which markets bitcoin savings plans, however. According to him, an algorithmic stablecoin like the UST is “a gas factory”, and its “own creators don’t even know how it works anymore.”

“We are testing the solidity of the sector. This fall shows which players are covered and which are not, “adds Nicolas Chéron.

“This collapse of the cryptocurrency market is not the first and it does not call into question the technological innovation that is the blockchain,” recalls Vincent Boy. If the outlook is negative in the short term for prices, their fall “could consolidate the technology and the market in the long term,” he believes.

Bitcoin could still go down and why not go down to 20,000 dollars. Unless the economic and geopolitical environment suddenly improves, a sharp rise in the price seems unlikely in the short term. But its decline could also bring it back to more attractive prices. “The observed sharp decline could give rise to a psychological rebound, as many long-term investors should see this as an opportunity,” notes Vincent Boy. Something to reassure the holders of the cryptocurrency a little.

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