A few weeks ago, cryptocurrencies saw a significant decline in the market. On Thursday, May 12, the market’s most popular digital asset, Bitcoin, plummeted nearly 6% to $26,755, its lowest level since late December 2020. A day later, the ‘crypto’ recovered ground reaching as high as $30,462. Currently, Bitcoin is now gradually recovering, rebounding 2% after Friday’s steep rise, when it soared 14%. Kimberly Rosales, a specialist in the crypto space, explains what are the reasons that have led to this behavior in cryptocurrencies.
The situation of Ethereum, another of the most important cryptocurrencies, was also affected. It even dropped below $2,000, its lowest level in almost a year. It is now struggling to hold at $2,000, after a week ago down 2.36%.
Rosales says that this was made worse by increased selling pressure, which was indicative of investor flight. “Collateral damage due to this loss of value is what is happening with the Luna asset. It has also experienced a sharp decline, more than 90%, to virtually losing its value,” she adds.
Both “cryptos” are linked, and traders use a computer protocol for controlling, regulating and stabilizing prices. Investors can change Terra and Luna to ensure that they do not become unstable. This mechanism is no longer effective.
“The interventions of the Luna Foundation, responsible for both ‘tokens’ and on which the focus is now directed, have been responsible for this misalignment,” assures Rosales. “Its role in the cryptocurrency market has been key, amassing millions of dollars in Bitcoins to back Terra. However, now they are looking to get out of this to try to save the price of the ‘stable coin.’ Its creator has already reported that it will “rebuild” the product, modify its mechanism and raise more capital.”
Bitcoin has suffered a sharp decline in the context of tighter monetary policy by central banks to counter high inflation. The loss of nearly 6% to $26,755 is more than 61% from record highs set at the end of 2021.
“Another cause of this event is largely linked to the behavior of the stock markets,” explains Rosales. “The benchmark cryptocurrency has largely proven to be correlated with other risk-sensitive assets, such as equities, and especially tech stocks.”
The Nasdaq Composite, on which companies linked to this large-cap sector trade, has lost more than 25% this year, putting it in the bear market territory, while the S&P 500 is down 16% Bitcoin has lost more than half its value since November.
Another group that has been affected by the crypto crash is large investors. Tesla is one of the many professionals that decided to include Bitcoin in their treasury. Because of the importance of digital currencies, Elon Musk’s automobile company was able to turn the tide.
Its investment is worth $140million less. Tesla’s digital assets have a value below $1.36 Billion. This represents a decrease of over 9%.
Japan’s Nexon, a company that specializes in video games, invested 100 million in Bitcoin to “maintain our cash asset’s purchasing power.” They are now worth just 54 million. The company Seete, which is owned by Aker, an oil company, has a latent loss close to $22 million.
El Salvador, a Latin American country that was also affected by the earthquake, is another collateral injury. This country became the first to accept bitcoin as legal currency. It approved it on September 20, 2021.
The country’s president, Nayib Bukele, opted to develop an electronic wallet of his own, Chivo Wallet. Subsequently, he made sure to buy this digital asset to offer bonds to the citizenry. The payment amount was the equivalent of $30 per person at the time of delivery. The collapse of this crypto has also meant the fall of the prices of its sovereign debt, comparable to the figures marked by Ukraine.