The crypto market has recently experienced a rather dramatic dip down to $37,000 from $55,000. This drop came about rather quickly and caught many people off guard. The exact causes behind the downturn are unknown, but some events did occur that would cause the market to drop. We will explore some of the potential causes and events that likely caused the massive price decrease in cryptocurrency.
Reasons for The 2022 Crypto Market Dip
As we mentioned previously, there are a lot of reasons behind the crypto market dip. Here are a few of the reasons behind the 2022 crypto market dip.
It’s important to note that the below list is not exhaustive, but it does offer some insight into the many factors that impact the crypto market.
Russia Tightens Down on Crypto
The first shot over the bow for crypto was Russia announcing a proposal for a soft ban on cryptocurrency. The crypto market, as you might expect, completely tanked at the announcement of the proposal.
Russia likely will ban cryptocurrency in the coming years. However, that’s not particularly concerning because of the way cryptocurrency functions.
Unfortunately, the crypto market panics at any negative regulatory announcement from a major country. It’s undeniable that the announcement from Russia had a severe impact on the price of Bitcoin and cryptocurrencies in general.
Cryptocurrency has been in a bull market for about a year.
That’s a long time for a crypto bull market!
The downside is that people get tired seeing news about cryptocurrency. Also, all the people that want to buy cryptocurrency have already purchased it.
Basically, what we’re trying to say is that bull markets don’t last for a super long amount of time. The market mostly operates in boom and bust cycles, but it always trends upwards in the long-term.
Some people claim that crypto has entered a sort of super cycle where the price trends upwards without going down. We find that unlikely and no evidence suggests that any cryptocurrency, even Bitcoin, has entered a so-called supercycle.
The US Fed Plans to Increase Interest Rates
The US Federal Reserve announced that they plan to raise interest rates at least four times in 2022 to combat inflation. This announcement should come as no surprise to anyone that has followed the US economy in 2021.
Inflation in the US has been extremely high because the Fed printed a lot of money and dropped interest rates to 0.
0% interest rates are unsustainable for any extended period of time. The bad part is the inevitable raising of interest rates always causes a market downturn and could even trigger a recession or depression.
This relates to cryptocurrency because the crypto market generally reacts very poorly to any talk of raising interest rates. This is because Bitcoin, the premier cryptocurrency, is viewed as an asset by investors.
Assets perform well with low interest rates and high inflation because no one wants to hold cash. They tend to perform poorly with high interest rates and low inflation because investors are less scared to hold cash and bond rates go up, which means there are more places for investors to park their cash.
Uncertainty with Russia, Ukraine, China and NATO
Finally, there has been a lot of uncertainty surrounding the situation in Ukraine in regards to a potential Russian takeover. Many have speculated that a Russian takeover would trigger a NATO intervention, which would likely lead to a war with Russia and possibly even China.
Not to mention the potential for China to take over Taiwan if something occurs in Ukraine.
The overall point is that tensions between the world powers are high at the moment. Many speculate that a war could break out between Russia, China, and the US/NATO.
This again relates to cryptocurrency because the crypto market greatly dislikes any uncertainty. A good example of the crypto market collapsing was when lockdowns due to the COVID-19 pandemic first began in early 2020. Bitcoin actually hit its lowest price in years around the time.
You can expect the same thing to occur if the US/NATO does get involved with a situation in Ukraine or China makes a move in Taiwan. The market has already crashed a little bit simply because of the tensions, imagine if the tensions boiled over and a war broke out?
The price of most cryptocurrencies would collapse as people panicked and sold their crypto bags.
Is Crypto in a Bear Market?
It’s difficult to say whether or not crypto has entered a bear market or whether this market dip is only temporary. Our gut instinct tells us this is the beginning of the bear market – the bull market lasted about a year, which is the historic trend for bull markets.
An argument can be made that this is only a dip. However, the only way to know is to wait and see.
We know that’s not the answer people want to read. But it’s simply impossible to know whether a bear market has begun a week into a market dip. You may remember that the market dipped in the summer of 2021 for a few months until the NFT craze jump started the crypto market. The launch of Ethereum 2.0 might see the market increase, but that’s a big might.
Is Crypto a Good Investment?
Yes, crypto is a good investment. But it does greatly depend on the cryptocurrency that you purchase. We recommend sticking to Ethereum and Bitcoin as the two main coins in your portfolio. Other projects like Chainlink only make sense once you have a large enough base in Bitcoin and Ethereum.
You should avoid dog coins like Dogecoin and Shiba Inu at the moment. If this really is the beginning of a bear market, then memecoins may take a very long time to return to previous all-time highs.
Should I Leverage a Long Position in Crypto?
No, leverage is generally viewed as a terrible idea unless you really know what you’re doing with the crypto market. It’s very easy to lose a lot of money playing with leverage in cryptocurrency.
Yes, it is possible to make a lot of money leveraging a long position in cryptocurrency, but the risk outweighs the reward. Even a small amount of leverage can cause liquidation if the market crashes hard.
That mostly covers it for what is behind the crypto market dip in 2022. No single factor led to the dip. Instead, a combination of many factors came together at the perfect time to cause a market dip.
It remains to be seen if this market dip will mark the beginning of the bear market or if the market will recover. One thing is for certain, however, and it’s that major cryptocurrencies like Ethereum and Bitcoin will recover at some point – they always have recovered in the past.