Crypto market meltdown linked to sell-offs triggered by inflation
Sunday May 22 2022
A man buys bitcoins at a Bitstop ATM in Miami. Last week, the cryptocurrency market witnessed one of the worst meltdowns with Bitcoin falling by more than 50 percent. PHOTO | AFP
The cryptocurrency market witnessed one of the worst meltdowns last week, with the total market capitalisation falling by 40 percent to $1.3 trillion in just a month, but traders stay put, confident that the market will soon revamp.
Experts say the meltdown was caused by massive sell-offs spiked by speculations due to rising inflation in most countries, coupled with a move by some nations, including the US, UK, Australia and India, to raise interest rates to tackle rising commodity prices.
“The effect of raising interest rates is that as people reduce their expenditure, they also reduce their investments, and that cuts across the crypto, stocks and equity markets,” said Rufas Kamau, a Nairobi-based financial markets analyst and researcher.
Massive losses
With the price of Bitcoin, the largest and most popular cryptocurrency, falling by over 50 percent since November 2021, crypto-traders are now counting cumulative losses of at least $1.2 trillion over the period. But this has not affected the appetite for the volatile digital assets as traders believe the prices will soon rise and stabilise.
Timothy Kamau, a Nairobi-based cryptocurrency investor, told The EastAfrican: “I’m not sure how long it will take to resume, but I know eventually the prices will rise again. That’s why I haven’t lost interest.”
Based on statistics by global crypto assets tracker CoinMarketCap, Bitcoin’s price rose from about $26,000 last week on Thursday and is currently trading at just above $30,000.
“It has been worse before, and still prices revamped. This is certainly not any different,” remarked Eric Michubu, a Bitcoin entrepreneur.
The worst affected cryptocurrency was the fairly new Luna, which had been trading at about $116, but slumped to $0.0002. Digital asset traders say the collapse of Luna sparked fears among smallholder retail investors in other digital assets, causing them to sell off to avoid the risks.
“It is possible that there was market manipulation to instigate the fears, leading to the sell-offs, because what happened with Luna is unnatural,” said Mr Michubu.
High volatility is among the main reasons regulators — including the Central Bank of Kenya, the Capital Markets Authority and the International Monetary Fund — have consistently warned against cryptocurrencies, encouraging other forms of digital currencies like central bank digital currencies.
For regulators, crypto-investments remain a challenge because they siphon out money that would otherwise be invested in the countries’ stock and equity markets, which suffer low domestic participation.
But Mr Kamau says global trends show that whenever investments in crypto markets fall, so do those in equity and capital markets, which means that the cryptocurrency meltdown will not benefit regional bourses.
“When people sell-off investments in the crypto markets, it is usually due to the same reasons people sell-off in the stocks and equity markets,” he said.
The effect of sell-offs has also been felt at the Nairobi Securities Exchange (NSE), which shed $2.5 billion in one month since April 13, as foreign investors fled.