Everyone who invests in cryptocurrencies is thinking about "crypto winter" right now .
Since their all-time high in 2021, when they were at the top of a huge bull market surge, the value of cryptocurrencies has dropped by a staggering $2 trillion. To get started with trading cyrptos, visit the official website https://bitcoin-profit.cloud/.
Bitcoin, the most valuable digital currency in the world, has lost more than 70% of its value since November when it was worth about $69,000.
Because of this, some people in the business world are worried about a "crypto winter," which is a long-lasting bear market. Something like this didn't happen again until between 2017 and 2018.
But the latest cryptocurrency crash is different from market corrections that have happened in the past. The most recent cycle has been marked by a series of events that have spread through the industry because the companies are all connected and use similar business strategies.
After going up a lot in 2017, prices for bitcoin and other cryptocurrencies went down a lot the next year (2018).
At the time, people were pouring money into crypto projects that were springing up everywhere, and the market was full of "initial coin offerings." But in the end, most of these projects didn't work out.
The research director for crypto data company Kaiko, Clara Medalie, told CNBC that "the 2017 crash was mostly caused by the bursting of a hype bubble."
But the latest meltdown started earlier this year because the economy as a whole was having problems, such as high inflation. This made the US Federal Reserve and other central banks raise interest rates, which made the stock market go down. None of these things were there in the last cycle.
Bitcoin and the cryptocurrency market as a whole have been traded in a way that is very similar to how other risky assets, like stocks, have been traded. During the second quarter of this year, Bitcoin had its worst quarter in more than a decade. During the same time, the value of the tech-focused Nasdaq fell by almost 22%.
This sudden change in the direction of the market surprised a lot of people, from hedge funds to lenders.
The basics of how leverage works
Investors in cryptocurrencies have a lot of debt because there are so many centralised lending schemes and so-called "decentralised finance," or "DeFi" for short. DeFi is an umbrella term for all financial products made with blockchain technology.
But the way this cycle of leverage works is very different from the last one. Martin Green, CEO of the quant trading company Cambrian Asset Management, says that most of the leverage available to individual investors in 2017 came in the form of derivatives traded on cryptocurrency exchanges.
When the cryptocurrency markets dropped in 2018, regular investors had to sell their positions right away on exchanges because they couldn't pay margin calls. This made sales go down.
There was a huge increase in yield-based digital currencies and "shadow banks" that use cryptocurrencies starting in 2020 and going forward."
Because credit risks and counterparty risks were not looked at closely enough, there were a lot of loans that were either not secured or did not have enough collateral. In the second quarter of this year, when market prices went down, margin calls forced funds, lenders, and other parties to sell.
High chance of making money, but also a high chance of losing it.
Alexander of Sussex University says that the recent change in the value of crypto assets may be because many crypto businesses made risky bets that left them open to "attack." One of these firms was Terra.
It's interesting to see how this infection has been linked to some well-known cases.
Customers who put their cryptocurrency with the company Celsius got returns of more than 18 percent. At the start of this month, the company stopped letting customers get their money for a short time. The way Celsius worked was a lot like how a bank works.
Then, it would take the cryptocurrency that people had deposited and lend it to other people at a very high interest rate. It would be used to trade with the other players. The money that Celsius made from the yield would be used to pay back investors who had already put cryptocurrency into the company.
But this way of doing business was put to the test when the economy started to get worse. Celsius is still having trouble with its liquidity, so the exchange has to temporarily stop withdrawals to prevent the cryptocurrency equivalent of a bank robbery.
"Players who wanted high returns traded fiat currency for cryptocurrency and used lending platforms as safes," said Alexander. "How else could they pay such high interest rates? They put the money they got to work in very risky ways." "Players who wanted to make a lot of money switched from cash to cryptocurrency and used lending platforms as safes.