Why Is Crypto in Decline?

Cryptocurrency prices are not what they used to be. If someone time-travelled from 2021 to 2023 and saw what Bitcoin is worth today without context, their jaw would likely be on the floor. What could have possibly happened in the past two years to lead us here?

The answer is: many, many things. The cryptocurrency market hasn’t been the same for some time now. But why have crypto prices shrunk so much? And is there any hope they’ll grow again, especially this year?

To answer these questions, we’ll take you on a quick history of everything that went on in the crypto market over the past two years. Let’s find out why crypto is in decline and whether there’s any hope for it in the near future.

The Crypto Boom of 2021

Pick any cryptocurrency you want, and we can bet it was never worth more than it was in late 2021. That year, the whole crypto market saw massive growth, with many digital assets reaching their highest prices between August and November 2021. 

For example, Ethereum hit an ATH of slightly over $4,700 per coin in mid-November. Similarly, Binance coin (BNB) reached $650 around the same time. And the most stunning winner of them all was, of course, BTC. Bitcoin’s price broke multiple records and peaked at around $67,000 in November 2021.

At the time, the total market cap of all cryptocurrencies together was over $2.8 trillion. Compare that to today, where crypto’s market cap is less than half of that at $1.19 trillion, and that’s quite the difference. So, why was crypto worth so much back in 2021?

Many factors worked in conjunction to cause the crypto boom of 2021. These included widespread vaccinations and hope for an end to the health crisis the world went through in 2020 and early 2021, hopes for a less acrimonious relationship between the US and China after Trump’s term as POTUS ended, and widespread economic recovery, which inspired major central banks like the Federal Reserve to start hiking interest rates again.

In other words, both sentiment and policies were shifting in 2021, and the market was optimistic. The tech sector (fintech included) was doing especially well. After all, digital businesses were not hit as hard by the crisis as the service sector was.

But the past is the past. The more important question is, in what shape is the market today?

State of the Crypto Market in 2023

Cryptocurrencies had a miserable time in 2022. Too many things did not work out in their favour last year, causing a Bitcoin crash and a long-term downturn in crypto assets.

Nevertheless, this doesn’t necessarily apply to 2023. True, crypto tokens are fat from their 2021 ATHs, but they’re also not doing quite as poorly as they were last year. 

For example, at the end of December 2022, the market capitalisation of crypto was $790 billion. That is less than a third of the market’s maximum just a year prior. However, soon after 2023 started, this number went above $800 billion. It has consistently climbed since then, surpassing one trillion USD in January and holding steady above that level since.

Sure, crypto seems to be far from another price boom. But at the same time, it also looks as if the worst is in the past. Digital assets are now on their slow but steady path to recovery.

What’s Driving Crypto Prices Down?

To better anticipate how cryptocurrency values will unfold, it is essential that we look more closely at the factors which are keeping crypto tokens down. Logically, in the absence of these factors, we could see the market perform much better.

Though this list is not exhaustive, here are some of the more recent events that have upset the crypto industry. 

The Terra-Luna Crypto Collapse 

For any asset class to be doing well, people need to trust that it’s secure and reliable. But crypto, with its high volatility, rarely manages to tick these boxes. 

It’s easy to believe in the potential of cryptocurrencies when they’re doing well. Nevertheless, if they start misbehaving or get hacked, that instantly tarnishes the reputation of the whole crypto sector. 

Unfortunately, in 2022 we saw two prominent cryptocurrencies crash and burn, namely Terra and Luna. The two share an ecosystem, so it made sense that what happened affected both of them. Terra (UST) is a stablecoin, i.e. a digital asset pegged to the US dollar. Meanwhile, Luna is the native token of the Terra ecosystem, essentially there to serve as a support beam or a volatility shield for UST.

Analysts estimate that when Terra became unpegged from the dollar, and both cryptocurrencies quickly became worthless, the crypto market as a whole lost $500 billion of its value. Naturally, an incident of such epic proportions hit the market like a tsunami, driving prices down all across the sector.

Central Bank Actions

Crypto is not subject to regulation by central banks like fiat currencies are. For this reason, many people may mistakenly assume that the actions and policies adopted by regulators don’t affect digital assets. Nevertheless, that’s not the case.

Though not directly tied to inflation, crypto does depend on overall economic sentiment to some degree. In fact, the sector seems to track the stock market fairly closely. When things are looking good in the economy, digital assets also do well. Likewise, when sentiment turns pessimistic, even the best cryptocurrency suffers.

Over the past year, the Federal Reserve has been consistently hiking interest rates in the US. This hawkishness seemed necessary in the face of rampant inflation. However, these rate increases were not good for crypto. 

During the June meeting of the Federal Reserve, the central bank decided to leave the rate unchanged. However, the markets expect at least two more hikes in 2023, which may put more pressure on crypto.

Cryptocurrency Exchanges Suffering

Aside from brokers or broker-aggregator platforms like Quantum Prime Profit, crypto exchanges remain one of the main ways for most people to tap into decentralised finance. Crypto exchanges normally offer a user-friendly way for people to buy or trade tokens. Thanks to their high utility, exchanges are an essential part of the crypto infrastructure.

Nevertheless, some of the most prominent names in the industry got in trouble recently. One notable case is the bankruptcy of FTX. This company, previously one of the largest crypto exchanges, underwent a crisis in November 2022 that culminated in its total bankruptcy and the arrest of its CEO, Sam Bankman-Fried. This high-profile case severely impacted the way people view exchanges, eroding much trust.

Things didn’t exactly get better when Binance, arguably the most popular cryptocurrency exchange in the world, itself got into hot waters. Just recently, the US Securities and Exchanges Commission slapped Binance with a massive lawsuit. SEC claims that Binance has mishandled large portions of investor funds and has violated the securities laws in the US.

Quite naturally, this event further complicated things for crypto. If the biggest names in the industry don’t follow the rules and keep crypto investors’ money safe, how can anyone trust them? If there’s any surprise here, it’s that the cryptocurrency market didn’t take a bigger hit from this event.

Increasing Regulation

Lastly, another factor potentially keeping digital currencies down is the growing push for more regulation. In theory, more laws regulating the status and use of blockchain technology can help crypto find greater acceptance. At the same time, it goes against the core values of the cryptocurrency industry. 

As soon as more laws come into effect, crypto starts becoming less decentralised and free. One of the main reasons people flock to most cryptocurrencies is that they present an alternative to traditional money. As more laws are introduced, crypto will get less and less free. Some fear it will eventually resemble fiat currency – and suffer from its flaws too. 

Though regulation has both pros and cons, it’s worth keeping an eye out for it. One way or another, the market will react to it.

Can Crypto Recover in 2023?

It’s difficult to predict where the crypto market will go by the end of 2023. Thanks to its extreme volatility, it’s bound to keep reacting to everything going on in the financial markets. As of now, too many question marks remain to say for sure what will happen.

Nevertheless, crypto is doing better than it did in 2022. Some recovery is underway. Many crypto enthusiasts are hopeful that things will continue to improve. There is nothing wrong with this optimism per se. Still, investors should keep in mind that the markets are unpredictable. Nobody expected most of the events that rocked the boat in the past three years. Who knows what the future might hold?

It’s best to keep your expectations realistic. Yes, some improvement and growth in the market is well due. At the same time, it’s highly unlikely to see Bitcoin or any other token at its 2021 levels anytime soon. If you see price predictions that claim otherwise, remember to take them with a grain of salt. 

Disclaimer: Any information written in this press release or sponsored post does not constitute investment advice. Thecoinrepublic.com does not, and will not endorse any information on any company or individual on this page. Readers are encouraged to make their own research and make any actions based on their own findings and not from any content written in this press release or sponsored post. Thecoinrepublic.com is and will not be responsible for any damage or loss caused directly or indirectly by the use of any content, product, or service mentioned in this press release or sponsored post.

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