An array of cascading red graphs across various crypto exchanges has sent investors into a frenzy. The current crypto meltdown has been a reality check for many investors who were looking to make a quick buck from the digital currency.
Not only has crypto seen some of its worst months in terms of valuation, but it has also betrayed faithful crypto investors who thought these assets could offer them some economic stability.
But how did it come to this? Why is Bitcoin, a digital currency that was being heralded as the next big thing, now hanging by a thread with an uncertain future? What will be the future of crypto investors in India and globally?
Let’s take a look at some of the reasons behind this crypto turmoil, the damage it’s dealt investors and exchanges alike, and things to keep an eye out for in the coming days.
AS THINGS STAND
The year 2021 was one of the best times for crypto investors. While Bitcoin had hit an all-time high of $69,000 (Rs 54.5 lakhs) in November 2021, the overall Bitcoin market capitalization stood at almost $3 trillion. Analysts and crypto evangelists were predicting Bitcoin to cross the $100,000 dollar mark before the end of the year. Little did they know that the worst was yet to come.
Total crypto market capitalisation has dropped since November 2021. (Image by: CoinMarketCap)
January 2022 saw the crypto market drop below the $2 trillion mark and after that, it was all downhill barring a slight recovery in April. At the time of writing, the world’s largest cryptocurrency, Bitcoin, is trading at $19,165 (Rs. 15 lakhs approx) with a 7-day drop of 8.47 percent. This is close to the lowest it’s been in years.
Overall, it has slumped approximately 70 percent in value from its record all-time high last year in November, while other tokens like Dogecoin, Avalanche, and Solana, among others, have taken up to a 90 percent hit. As of today, the total market cap for crypto currently stands at $860 billion.
HOW CRYPTO GOT HERE
Many experts who have been commentating and writing in the crypto space for years hold global inflation to be one of the prime architects responsible for crypto’s disastrous situation.
The US Federal Reserve has been trying to fight the recession trap by hiking interest rates, which is one of its biggest hikes in 28 years. Though initially the crypto market was left unperturbed by a 0.75% hike, many market analysts believe it has led to aggravated inflation rates.
“Globally, inflation has forced central bankers to reduce liquidity in the market by raising interest rates. This is the primary reason for the fall in crypto markets. However, while the headline tokens are only taking a beating in price, and are likely to re-emerge once the slump is over, the smaller tokens will probably not survive the slump.”
– Ajeet Khurana, Founder, Reflexical
Even the stock market has dipped into bear territory – which means a 20 percent drop from its recent high. While the S&P 500 is down by more than 21 percent, Nasdaq has crashed 33 percent in 2022. India is also facing the brunt of this steady inflation with the Nifty50 down by 15 percent from its all-time high (18,604.45) back in October 2019. It’s clear that inflation has played a role in the downfall of crypto and many people are turning away from the idea of investing in such volatile assets. The sentiment towards crypto as an investment has drastically changed.
Rohas Nagpal, who is the Chief Blockchain Architect of the Hybrid Finance Blockchain (HYFI) has cited the following reasons for the crypto crash:
–Extreme over-valuation of most cryptocurrency projects.
–The gloom caused by the Russia-Ukraine conflict, and COVID lockdowns.
–Governments are getting harsher towards crypto.
Many governments across the world are looking to regularlise crypto.
One of the reasons many governments are wary about crypto is because of its decentralised nature and transaction history that is impossible to track. Seeing the potential risks involved, the Indian government during the last budget session announced a flat 30 percent tax on the transfer of digital assets, including NFTs. Also, in April this year, the National Payments Corporation of India (NPCI) disabled the UPI transfer feature for crypto wallets, making it even more difficult for people to transfer money from their bank accounts to their crypto wallets.
Not only that, but a recent announcement by the Central Board of Direct Taxes (CBDT) to levy a 1 percent Tax Deducted at Source (TDS) on all crypto transactions hasn’t gone down well with the crypto community.
The sale and/or transfer of Virtual Digital Assets (VDA) will be subject to TDS effective today.
— CoinSwitch Kuber: India’s Largest Crypto App (@CoinSwitchKuber) July 1, 2022
While many crypto investors see these regulations as attempts to dissuade people from investing in crypto, others worry that a blanket ban like in China or Egypt could be imposed in the future.
It’s just not India, many other countries have deployed strict regulations on cryptocurrency transfers due to their close ties with the dark web and other malicious activities on the internet. Just recently, the EU said new legislation has been agreed upon where transfers of crypto assets will be traced and identified to prevent money laundering, terrorist financing, and other crimes.
There are two sides to this. On one end, with regulations in crypto, investors can be protected against unprecedented amounts of losses suffered due to the crypto market crash and bad actors can be traced, while on the other, cryptocurrencies regulated under the watchful eyes of a centralised body defeat the purpose of its existence and people don’t warm up to the idea of crypto as a viable asset class.
To add to this, the recent crash of one of the crypto’s biggest projects, TerraUSD, and Luna tokens, has also compounded the crypto market’s miseries.
THE ONES WHO CAPITULATED
The crypto meltdown has had its fair share of victims. The meltdown has led one of the biggest crypto hedge funds, Three Arrows Capital (3AC) to enter liquidation after it failed to make payments on a loan of 15,250 Bitcoin (Rs 2,557 crores approx) and USDC worth $350 million (Rs, 2,761 crores approx). The $10 billion crypto hedge fund was an investor in Terra and had made leveraged bets on numerous tokens that are currently struggling, including Bitcoin, Ether and Solana. Other big names like Voyager and BlockFi have also filed for bankruptcy only to be reduced later thanks to funding by billionaire crypto boss Sam Bankman-Fried.
Many big names in the crypto exchange space have been left with no other option but to lay off a part of their workforce. One of the biggest crypto exchanges, Crypto.com, cut a total of 400 jobs on June 16, while Coinbase announced it laid off 18 percent of its total workforce; that’s 1,100 employees.
Major crypto exchanges have laid off employees due to the slump.
Though Indian crypto exchanges haven’t undertaken such drastic measures to ward off the current crypto calamity, I don’t think it’ll be easy for them to stay afloat if the market doesn’t improve.
A Coin Telegraph report said that more than 80,000 Bitcoin investors had their millionaire status revoked with a mere 26,284 addresses that were reported to contain holdings valued at upwards of $1 million. That’s a 75% decline over the past 9 months. Also, the number of Bitcoin Whales (addresses holding more than $10 million Bitcoin value) dropped prodigiously from 10,587 addresses to just 4,342.
HOW SHOULD INVESTORS DEAL WITH THIS?
Since many crypto investors now understand that betting big on crypto isn’t the smartest investment decision, they should always look to invest the money they would be okay parting with. Investing your savings in crypto is never a wise decision.
For Indian investors, this is a period to assess their investment time horizons, risk appetite and construct their portfolios accordingly. Above all else: Learn about the projects before investing; understand the use-cases and potential and refrain from being influenced by peer pressure
– Parth Chaturvedi, Crypto Ecosystem Lead, CoinSwitch
According to a study by crypto market analysis firm Glassnode, despite the negative sentiment and the decline in the net worth of former Bitcoin millionaires, more than 13,000 new “wholecoiners” — a wallet that contains one or more Bitcoin tokens — have been added to the market. What is another hearty sign for Bitcoin believers is that more than 2,50,000 addresses have added 0.1 Bitcoin token or more to their holdings over the past 20 days.
A Capgemini’s 2022 report also says that High Net Worth Individuals (HNWI) have embraced crypto with other digital assets with over 71 percent of the almost 3,000 individuals investing in digital assets.
This indicates that the adoption of cryptocurrencies is still on a high with many investors not giving in to the current market pressure.
On the contrary, Rohas Nagpal believes that many of the crypto exchanges will go bust during this phase and might not recover. Only projects with solid revenue models and good use cases can expect to rise from the ashes of the ‘Great Crypto Crash of 2022.’
Analysts at CoinSwitch also believe that the TDS implication post-July will set the course for the rest of the year, as exchanges will stabilize at lower levels of liquidity and get a better sense of the INR premium vs offshore markets. Not to mention that they also have faith in Ethereum’s ‘Merge’ or transition to a ‘Proof-of-Stake’ consensus model—possibly in September-October, which is being touted to be a huge positive catalyst for the entire ecosystem.
Historically, there hasn’t been a continuous 4-year holding period wherein Bitcoin returns have been negative and that’s something that investors can look forward to in the long run. Since Bitcoin is the lord of all other tokens, we can expect the market scenario to improve once Bitcoin returns to greener pastures. However, the bigger question is, will it be anytime soon?