Reasons for Over $500 Billion Crypto Market Crash

Kavya  |  May 20, 2021

In the last 24 hours, the crypto market which includes digital assets such as Bitcoin, Ethereum, and Dogecoin, has plummeted. Most of the coins fell by more than 40% intraday to their lowest levels in months, causing investors and the overall crypto space to panic. Because of the recent crash, the entire crypto market panicked, and over $500 billion in value has been dissipated since the crypto market's peak.

Reasons Behind Over $500 Billion Crypto Market Crash

That's exactly what happened, when exchanges caused more than $8 billion in liquidations, resulting in the reasons for the crash of the $500 billion crypto market into a complete flight mode, sparking even more sales.

1. Fears Over Crypto Transactions Crackdown in China

Reuters, a global news agency, released a dramatic headline on Tuesday claiming that China had outlawed cryptocurrency. The actual news was much less dramatic: the country's central bank and a handful of payment firms had merely restated rules restricting crypto transactions that had been in effect since 2017.

All of this frightened several cryptocurrency investors, who were already on edge due to recent uncertainty, resulting in an over $500 billion crypto market crash.

2. Elon Musk's Tweets Controlling Price Alterations

In the last week, the Tesla CEO has single-handedly wreaked havoc on the crypto market, using tweets and media appearances to drive the prices of Dogecoin and Bitcoin up, down, and sideways. These include Musk's tweets last weekend, which indicated Tesla was selling its $1.5 billion Bitcoin hoard, triggering a wave of selling that contributed to this week's wider uncertainty in the crypto sector. However, even he didn't think it would lead to an over $500 billion crypto market crash.

3. Positions That Were Leveraged Were Liquidated

Market liquidations did not trigger the initial sell-off, but they did intensify it. In layman's terms, many companies bet on Bitcoin with borrowed money (leverage), just as retail investors would get their brokerages to front them with collateral based on the shares they already hold. This is perfect when prices remain relatively stable or rise.

However, when rates fall dramatically, trading houses become concerned and need firms to post additional collateral. If the companies are unable to do so, the trading houses may liquidate their holdings to cover their exposure.

That's exactly one of the reasons for the crypto market crash, when exchanges caused more than $8 billion in liquidations, resulting in a flood of sell orders into an already agitated market, which triggered even more sales. And so forth.

4. Concerns About Tether's "Stablecoin" Reserves

Last week, Tether released a pie-chart breakdown of its reserves in 2014. What it revealed wasn't very reassuring to its critics. According to the table, the majority of Tether's deposits were in commercial paper and assorted loans - not the kind of assets that would pass muster if Tether were a normal bank. Tether, on the other hand, refuses to hire a standard auditor.

5. Macroeconomic Factors

The broader markets have been on edge as a result of macroeconomic factors such as inflation warnings and the United States government's and central bank's recent decisions to maintain loose fiscal and monetary policy (i.e. stimulus payments, deficit spending, and low-interest rates). It also played a part in the over $500 billion crypto market crash.

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