Why Cryptocurrencies Drop Like a Rock Nowadays?

Evergrande is feared to be the cause of a financial crisis, with cryptocurrency being one of the assets liquidated by investors to prevent risk.

What happened?

On Monday, cryptocurrencies had a bad start to the week, with several losing 10% or more. Investors commonly engage in a “risk-off” transaction, in which they sell riskier assets in exchange for more stable ones, which disproportionately harms cryptocurrencies. There’s also concern that the financial markets are on the verge of collapsing, and that if that happens, asset values, including crypto, will plummet, forcing traders to panic-sell or be forced to sell due to margin calls, triggering a cascading market impact.

Main cryptocurrencies (such as Bitcoin, Ethereum, Solana, Cardano etc) have dropped more than 10%. Smaller crypto assets have plummeted much more, indicating that the crypto industry as a whole has plummeted.

So, what exactly is it?

On Monday morning, the stock market was down substantially as investors weighed the danger to asset prices. A real estate developer called China Evergrande Group is poised to miss interest payments on loans this week, and the company’s $300 billion in obligations might have a cascading effect on financial markets.

Investors may be hesitant to engage in Chinese real estate debt or stock if a significant business like Evergrande defaults, which might have an influence on debt and equity markets in the United States. In the worst-case scenario, something akin to the “Lehman moment” occurs: one company’s failure triggers a domino effect across financial markets, hurting both the value and liquidity (or the capacity to sell financial assets rapidly). At this stage, such comparisons may be speculative, but investors are clearly concerned that values have gotten too high, too fast, and that some catastrophe will cause a market crash soon, so huge reactions to news like Evergrande aren’t unusual.

On a more crypto-related topic, The New York Times reported this weekend that the Financial Stability Oversight Council may consider stablecoins (which are linked to a real currency such as the US dollar) to be systemically hazardous. This would make them subject to regulation, which might have a significant impact on the stablecoin market.

What’s next?

Cryptocurrencies are now trading assets for investors rather than being a utility product, which is the reality. As a result, when markets fall, cryptocurrency prices would most certainly fall as well. That is precisely what we are witnessing today.

What we don’t know is whether or not cryptocurrency values will recover. If there is a financial catastrophe on the horizon, I am concerned that stable assets such as the US dollar will be the safe haven, rather than cryptocurrencies, which have limited utility.

We also have no idea how the crypto market will respond in a crisis. Will investors sell in a panic, resulting in margin calls for some and more selling? Given the recent volatility in crypto pricing, I believe we will see massive price fluctuations if financial markets are endangered. If that’s the case, this isn’t likely to be the last major drop in cryptocurrencies this year.

Kiara Sofia Smith

My current focus is blockchain technology and cryptocurrency. One could even call me a blockchain “enthusiast.” I have worked for almost a decade on several financial projects related to the stock market news, fundamental research and technical analysis for several blogs.

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