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Tuesday, January 31, 2023

What Caused the Crypto Crash?

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At its peak value, a single bitcoin was worth more than $62,000! These days, it is trading at closer to $16,000 per coin, and the rest of the cryptocurrency market is similarly deflated. Of course, this is still a huge step up from the early days when you could buy 20 bitcoins for a dollar.

In recent days, many people are talking about the crypto crash. This refers to the crash from the peak popularity of cryptocurrency when a Bitcoin was worth more than $62,000 down to the $16,000 number it is closer to today.

Why did such a huge and thriving market lose about 70% of its value? After so many people made it rich by investing in crypto, how did so many people lose money in recent years? These are the questions we will need to understand to comprehend why the crypto market crashed the way it did.

Read on to learn all about some of the biggest contributing factors to the crypto crash!

Why Did Crypto Crash?

The first thing to understand is that there is no single cause of the crypto crash. Instead, the crypto market went through what you might call a series of unfortunate events.

Looking back, we can identify some of the early causes of the decline of the crypto market. However, these early problems did not cause many of the later problems to come to be. Rather, these later problems were already lying dormant.

That means that we cannot simplify the story of the crypto crash down to a few problems that spiraled out of hand. Instead, we are looking at many factors that are mostly unrelated and all contributed to decreasing the popularity of the crypto market.

So what was one of the first things that caused people to take their investments out of the cryptocurrency market?

Dogecoin Hurt the Crypto Market

Considering how many people have made and lost their fortunes on cryptocurrency investment, you might imagine it would be a more serious business. However, this story is about Elon Musk and dogecoin. It is one of the more amusing occurrences that contributed to the crypto crash.

Or, it would be if it did not have such serious effects on the crypto market.

Dogecoin started out as a joke crypto coin. It gets its name from a popular internet meme known as the Doge. This meme features a chubby dog face.

The creator of this coin has said that they started and finished making it in a single day.

On top of that, one of the most famous attractions of cryptocurrencies is that they are almost never subject to inflation. The very first cryptocurrency, bitcoin, was designed to have a limited number of units of currency.

That meant that the value of an individual unit of currency could not continue to decrease as more and more currency units were created. This helps avoid some of the problems with traditional fiat currencies.

Many traditional currencies have experienced hyperinflation and gone extinct because of the problem of creating more and more units of currency. However, dogecoin made a point of embracing this problem.

Dogecoin Allows Infinite Inflation

Unlike most cryptocurrencies, it is designed so that there can be an infinite quantity of dogecoin units of currency. As ridiculous as this might sound, dogecoin rose to become one of the most popular cryptocurrencies on the planet.

Some people even made their fortunes in cryptocurrency by investing in dogecoin and then selling while it was still worth a lot. In recent years, dogecoin has moved between various places in the top 20 cryptocurrencies in the world.

So far in this story, dogecoin seems more amusing than a contributor to the crypto crash. So where does Elon Musk come into this?

Elon Musk and Dogecoin

For whatever reason, Elon Musk made a point of talking about dogecoin all the time. Some people think that he thought it was hilarious or that he wanted to be perceived as in on the joke.

However, what started as a joke turned into something more. People began to notice that when Elon Musk talked about dogecoin, the demand for the coin would go up. This would then increase the value of individual coins, allowing investors to sell them off at a profit.

People began to hypothesize that they could predict the ups and downs of dogecoin by tracking when Elon Musk would write tweets about it.

Around this same time, Elon Musk bought a huge quantity of bitcoin with his company Tesla. He announced that customers could buy Tesla cars using both bitcoin and dogecoin.

This added to the general crypto excitement and made bitcoin ATMs seem worth investing in. You can check out this page to learn more about how to benefit from these ATMs.

However, Tesla would later sell its bitcoin. With such a huge company seeming to backpedal on crypto, the market took a hit. People then began to look at Elon musk’s antics with dogecoin in another light.

People began to feel concerned about the possibility of market manipulation. After all, if someone can control the value of an investment by tweeting about it as a joke, then how could you ever know if your investment was safe?

However, the dips in the crypto market associated with these issues did not seem like the first of many problems to come. At the time, they seemed more like isolated incidents.

FTX Contributed to Crypto Crashing

On the other hand, one of the largest crypto trading platforms in the world went bankrupt in recent history. Worse than that, this platform went bankrupt because of alleged fraud. We are still waiting to see what the final outcome of this debacle with the former FTX platform will be.

However, the way it looks right now is that millions of people who used this platform will not be able to get their money back. However, the way in which people found out about this problem hurt the crypto market even more.

The face of the FTX company was Sam Bankman-Fried. People saw him as an amazing philanthropist, giving away many millions of dollars to charitable causes. On top of that, he seemed to come out of nowhere, creating one of the largest crypto platforms in a very short time.

There was so much excitement around this figure that when FTX collapsed, it also affected trust in the crypto space in general. If such a huge trading platform has been engaging in fraud this entire time, what does that say about some of the other trading platforms out there?

How can we know that the money we entrust to large crypto companies is safe? In many respects, it turns out that the answer is that we cannot know for sure.

The Independence of Crypto

One of the reasons that cryptocurrency is so valuable is that it allows for transactions that do not depend on the approval of governmental or financial institutions. However, this also means that it is more difficult to track and regulate cryptocurrency activities.

This is what created enough fog for FTX to engage in its shady behaviors without getting caught for so long. Although the courts have yet to make a verdict, many people look at the whole FTX debacle as a straightforward scam.

Some fraction of those people is also looking at the entire crypto space in the same way. This is one of the biggest single contributors to the current dip in crypto demand.

Inflation Affects Cryptocurrency Prices

For a while, inflation seems to be the ally of cryptocurrency investment. As the government printed more dollars, people began to purchase cryptocurrencies to avoid losing the value of their dollars to inflation. The longer this inflation went on, the more people poured their money into cryptocurrencies.

In fact, this seems to contribute to the popularity of the crypto market before its big crash. However, the government and financial institutions have been taking steps to help slow inflation. They have adjusted interest rates for loans and encouraged more careful spending.

As a result, our difficulties with inflation are now hurting crypto rather than helping it.

Investing in Crypto Became Popular

Back in 2013, a single bitcoin was only worth $100. There was a long time when only a few million people around the world paid attention to the cryptocurrency space.

Then, more and more people made it rich by investing in crypto. As interest in cryptocurrency increased, almost everyone heard about it and many more people began to invest in it. This influx of new investors tempted some investors to sell off their coins and make a guaranteed profit.

Although these things are difficult to prove, it does seem like some large investors made a killing by selling off their coins while the market was booming with new investments from people who were fresh to the crypto space. The result of this was that many new investors lost their money.

Since so many people have been burned by investing in crypto, there is much less excitement about jumping into crypto investment than there was before. On top of that, many people feel that there is no point in investing as a layperson because manipulators who are more expert will find ways to take advantage of it.

The Struggling Economy Affects Crypto

The whole global economy is going through a difficult time. As a result, people have less disposable income and sometimes need to eat into their savings and investments for extra cash. As long as the economy struggles, it will continue to pull demand for cryptocurrency investment down as well.

Cryptocurrency Is Not Sustainable

The more popular cryptocurrency gets, the more electricity people use to sustain it and mine more coins. However, this may be the wrong time to be using up the extra electricity.

Energy prices are high right now and many people are struggling as a result. Many people criticize the cryptocurrency space for wasting so much electricity during a time of scarce energy.

This makes cryptocurrency unpopular in many spaces and also makes people more reluctant to associate themselves with crypto spaces. If cryptocurrency comes back, it may do so in part by focusing on more efficient procedures that use up less electricity.

Cryptocurrency Was Intended for Transactions

When the first cryptocurrency was made, it was intended for making financial transactions. However, it fulfilled this function so well that demand for the currency increased. That meant that people who had bought cryptocurrency just to buy and sell things found their net worth increasing.

This was the beginning of treating cryptocurrency coins like investments or commodities rather than tools for making transactions. As more and more people have lost money by investing in cryptocurrencies, there is a renewed emphasis on using cryptocurrency as a tool rather than a commodity.

Governments Started Regulating Crypto

In the early days of crypto, there was a lot of excitement about how governments would not be able to interfere with cryptocurrency transactions. Cryptocurrencies use complicated technologies to allow them to remain independent of governments and traditional financial institutions.

However, more people have now realized that large governments have enough wealth to buy up the entire supply of even the largest cryptocurrencies. That means that if they ever want to control a cryptocurrency, no one would be able to stop them.

On top of that, the government has started to pass laws to regulate cryptocurrency. In places like China, many cryptocurrency activities are completely banned.

Cryptocurrency enthusiasts have seen that governments still have plenty of power over cryptocurrency spaces. That has somewhat diminished enthusiasm for cryptocurrencies. This is one more factor contributing to the crypto crash.

Understand the Many Causes of the Crypto Crash

The crypto crash may go down as one of the most important financial events in recent history. Experts and investors are still analyzing it and trying to figure out what went wrong. As the years go by, our comprehension of this event may become more detailed.

To learn more about the latest information in cryptocurrency, finance, and more, look through our other articles!

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