Here’s why Bitcoin, Ethereum, Cardano are down over 15% today

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The total crypto market capitalization fell below $1 trillion today.

Key points

  • Cryptocurrency prices fell sharply today, with Bitcoin hitting an 18-month low.
  • Ethereum and Solana dropped around 20% in 24 hours.
  • Higher-than-expected inflation figures and the suspension of withdrawals from Celsius were the main drivers.

Cryptocurrency prices were in freefall today as the market reacted to successive shockwaves of bad news. The total crypto market capitalization fell below the $1 trillion mark. Given that it topped $3 trillion last November, that’s a significant setback. Prices have rallied a bit over the course of the day, but today’s price declines are very likely to make it into the cryptocurrency history books.

At one point, Bitcoin (BTC) plunged below $23,000 as its 18% drop in 24 hours took it to an 18-month low. Ethereum (ETH) and Solana (SOL) were hit even harder, with both posting drops of around 20%. Cardano (ADA) fared somewhat better, falling around 15%, according to data from CoinGecko.

Why have cryptocurrency prices dropped so dramatically?

The best way to understand today’s crypto crash is to think of a snowball that gains weight and momentum as it accelerates downward. Firstly, the higher-than-expected inflation numbers sent shockwaves through the crypto and equity markets. Then, the popular decentralized finance (DeFi) lending platform Celsius announced that it would pause withdrawals on the platform. Additionally, Binance temporarily halted certain Bitcoin withdrawals for technical reasons, with the head of the Bank of England reiterating his view that crypto investors could lose all their money.

Inflation figures on the rise

The consumer price index (CPI) for May rose 8.6% year-on-year, more than many economists expected. This dashed hopes that the Federal Reserve’s economic tightening measures had already begun to reduce inflation. Analysts were already expecting another 0.5% rate hike this month. Now there is talk of an increase of 0.75% and the possibility that the Fed’s aggressive stance will last even longer.

The Fed’s priority is to control spiraling prices, and rate hikes are one of several tools at its disposal. All of his measures essentially mean less money is available, contributing to a risk-averse environment. Furthermore, it is becoming less and less likely that the Fed will be able to rein in inflation without triggering a recession. This uncertainty also has an impact on prices.

Celsius News Fuels DeFi Fears

Following the collapse of the Terra (LUNA) ecosystem, there is growing skepticism about crypto platforms that promise extraordinary rates of return. This was intensified today when another lending platform announced that it would stop withdrawals due to “extreme market conditions”.

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Celsius said he would meet his obligations and honor his retirement obligations over time. However, there is speculation about the platform’s ability to deliver on its promise. It doesn’t help that competitor Nexo referred to “what appears to be insolvency” in a Twitter thread offering to buy some of Celsius’s assets. The Celsius news is not only concerning, but raises broader questions about the entire decentralized financial system.

What it means for investors

These kinds of losses are hard for any investor to digest, especially after six months of declining value. If he bought cryptocurrency for the first time last year, it is very likely that his portfolio is worth less than what he invested, in some cases dramatically.

The big challenge is that prices could still fall further, as we are now in a very different economic climate. In 2020 and 2021, there was a lot of economic stimulus money related to the pandemic. We now face dramatic increases in the cost of living, fears of a recession, and a pullback from high-risk assets.

In the long term, Bitcoin can recover and reach new highs. It has always done it before, though it has a relatively limited price history, and many analysts remain optimistic about its potential. However, there are still many unknowns and the entire industry has several major hurdles to overcome. For example, we know that more regulation is planned, but we don’t know how strict it will be.

The Celsius story also illustrates another potential problem. If the prices remain low for a long period of time, there is a chance that other crypto platforms will fail. Savings accounts are covered by FDIC insurance against bank failures. In contrast, there is not much protection for crypto investors if a crypto exchange or DeFi platform crashes.

Bottom line

Every time investors dare to hope that the worst is over, cryptocurrencies show that they may fall further. Many investors may be tempted to cut their losses and sell now, which is understandable. But if you sell today, you will lock in your losses. You will not be able to benefit from possible price increases.

It is almost impossible to know what could happen next. This is a high risk asset class and there are no guarantees. However, if you can keep a long-term perspective and invest only the money you can afford to lose, you may be able to wait out this extremely difficult time.

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