A crypto crash is happening this month, erasing billions of dollars in market capitalization from top coins like Bitcoin, Ethereum, Tron, Dogecoin, and Shiba Inu. This plunge is a continuation of what happened in November when Bitcoin and most altcoins fell.
This article explores some of the top reasons why the crypto market crash is happening and whether the industry will recover.
Crypto crash is happening as the industry face numerous headwinds
The ongoing crypto crash, which has caused investors over $1 billion in losses, has been triggered by numerous bearish headwinds.
First, crypto prices are falling after S&P Global, a top rating agency, downgraded Tether, the biggest stablecoin company, to junk status.
The company noted that Tether is a much more different company than other similar companies in the way it backs its stablecoin. Instead of holding cash and short-term investments, the company backs USDT by several assets like gold, Bitcoin, commercial paper, and loans.
While this model has worked well from years, S&P Global believes that it puts Tether at risk if these asset prices plunge, claims that Tether has denied. The report said:
“A drop in the Bitcoin’s value combined with a decline in value of other high-risk assets could therefore reduce coverage by reserves and lead to USDT being undercollateralized.”
Tether’s downgrade is notable because of its role in the crypto industry. Data compiled by Artemis shows that there are $165 billion of USDT in circulation and 28 million holders. Also, the adjusted volume for USDT stood at over $1.3 trillion in the last 30 days. As such, a collapse would be the biggest black swan event in the industry.
Crypto liquidations rise as the Fear and Greed Index slips
The crypto crash also happened as liquidations rose to nearly $1 billion, reminding investors of what happened on October 10 when tokens worth over $20 billion were liquidated.
Analysts believe the real number of liquidations is much higher than the reported one as exchanges don’t share all the data. According to CoinGlass, liquidations rose to over $800 million on Monday this week. Most people who were liquidated are those who bought cryptocurrencies last week, expecting the rebound to happen.
The crypto market also crashed as a sense of fear spread in the industry. Data compiled by CoinMarketCap shows that the Crypto Fear and Greed Index remains in the fear zone of 16.
This fear increased after Strategy’s CEO hinted that the company may decide to sell its Bitcoin holdings to pay dividends if the mNAV dropped below 1. Such a drop is possible if Bitcoin and the MSTR stock price crash accelerate.
In a bid to calm the markets after that statement, the company noted that it had $1.4 billion reserve to fund its dividend and interest payments.
Why a crypto market rally is possible
Still, despite these challenges, there are reasons to believe that the crypto market recovery will happen this month.
First, the Crypto Fear and Greed Index has moved to the extreme fear zone, a move that may trigger a rebound in the near term. In most cases, crypto market bull runs start whenever the sentiment is weak.
Second, Bitcoin price remains above the important support level at $80,000, a sign that it may be slowly forming a double-bottom pattern, which is one of the most common bullish reversal patterns in technical analysis. In the case, chances of a rebound remain as long as the price is above that support level.
Third, the industry may benefit from the upcoming interest rate cut by the Federal Reserve. Economists and traders believe that the bank will cut interest rates on December 15, a move that will bring the benchmark rate to between 3.50% and 3.75%. A rate cut and the end of the two-year quantitative tightening process will boost crypto prices.
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