Why is the Crypto Market Down?

December 2, 2022
3 min

The recent FTX meltdown has raised a lot of eyebrows. The worst part: no one really knows what’s going on, given the different takes each media company takes. New York Times frames the FTX collapse as a result of mismanagement, Wall Street Journal highlights FTX’s charitable donations, and CoinDesk chief columnist David Morris claims,

“the FTX collapse was a crime, not an accident.”

No matter the case, the total losses could impact up to one million bank accounts – not to mention the fact that the magnitude of the collapse extends its coiling tentacles to the other large institutions in the cryptocurrency space.

Cryptocurrency brokerage Genesis is looking for $1 billion to help weather their liquidity shortage after a spike in withdrawal requests following FTX’s implosion. Worst case scenario? They could go bankrupt.

On a wider scale, the FTX contagion continues to scale as the US Senate has doubled its efforts to regulate the crypto economy, sending letters to six cryptocurrency firms, including Bitfinex, Gemini, Kraken, KuCoin, and Binance, to request a detailed explanation of their operations, revenue streams, and financial statements. 

That said,

FTX is NOT the primary cause of the down crypto market.

The market had already declined from its peak a year ago.

3 Possible Causes of 2022's Crypto Collapse:

1. Lack of Regulation

Although governments have been working on regulating the crypto economy since 2013, the path to regulation remains long and untraversed. The biggest crises in the crypto world happened because of the failures of centralized authorities, such as exchanges.

We believe that governments' inability or downright refusal to regulate the industry has caused significant damage to the ecosystem.

For years to come, regulators will be the poster child of everything wrong with the crypto world. Moving forward, regulators will need to move quicker to finalize their proposals because, despite the massive letdown that FTX was, crypto will not go away.

2. Rising Interest Rates

As crypto’s price stability remains up in the air, rising interest rates in an effort to slow inflation has negative ramifications in both crypto and the stock markets, as investors naturally tend to stay away from negative economic environments.

Interestingly, risky assets like stocks and crypto have been moving in unison for quite some time now. They’re both perceived the same way by many investors, although crypto is definitely the upstart younger brother. The impending recession also means that investors have less liquidity to invest or appetite for risk

For investors who made money off of immense bouts of crypto volatility, now may be the time to play it safe.

Read also: how to invest during a recession.

3. Natural Corrections In The Markets

Rising interest rates and regulatory bouts are not to say that this crypto winter came with no surprise.

The excessive growth of previous years has led to a natural correction in the markets. Crypto’s rapid expansion and proliferation into other industries, spurred on by rapid growth, has had mixed success. While digital currencies will likely remain a staple across many industries, NFTs and blockchain games have yet to find a consistent foothold in the market.

Crypto dropped. What did we learn from it?

These three factors have bogged down crypto prices since early 2022. If you’re unsure how to navigate these choppy waters, here’s what you could do to protect your investments further:

1. Deep Dive Companies:

Before putting your money anywhere, ensure you know the ins and outs of the company you’re working with.

Even a quick scan of their balance sheets and policies will go a long way to get you educated on their business practices.

Plus, it’s good practice for the long run. You’d never invest in a sketchy company, right? So why would you keep your funds in a sketchy exchange?

2. Don’t Keep Your Crypto On Exchanges:

If you’re afraid of an FTX-sized collapse of your favorite crypto exchange, move your funds out of your account and into a wallet.

Apart from keeping your funds safe in case of a collapse, a crypto wallet, both hot and cold, will encrypt your keys better than a crypto exchange ever will. Hardware wallets are particularly secure given that your password will never be exposed to a computer, reducing the risk of hacking.

3. Diversify:

Don’t skip this tip yet. Aside from the usual advice of “invest in different assets,” crypto portfolio diversification could also mean switching up your investment strategy.

Just because the markets are on a downward trajectory doesn’t mean your portfolio has to be. Use investment tools like put options and inverse ETFs to produce returns even in market declines.