Why is cryptocurrency crashing?

After starting the year very strongly, the cryptocurrency market has taken a downward turn and is crashing. We take a look at why.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businessman looking at a red arrow crashing through the floor

Image source: Getty Images.

The cryptocurrency market has historically been very volatile. It’s quite common for coins to experience huge gains and losses in relatively short periods of time. Recently, the market has taken a major downward turn, with many coins seeing their value dropping by big margins. Why is this happening? Let’s take a look. 

Before we continue, keep in mind that investing in cryptocurrency is extremely high risk and complex. The Motley Fool has provided this article for the sole purpose of education and not to help you decide whether or not to invest in cryptocurrency. Should you decide to invest in Cryptocurrency or in any other asset, you should always obtain appropriate financial advice and only invest what you can afford to lose.

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What is happening to cryptocurrency?

This year has been quite the roller coaster for crypto. The market started the year very strongly. For example, Bitcoin, the world’s largest and most popular digital asset, hit an all-time high of around £45,000 in April. Ethereum, the world’s second largest cryptocurrency, also reached a new all-time high of £2,950 in early May.

But since mid-May, crypto prices have been falling. On Tuesday 22 June, Bitcoin fell below £23,000, according to the crypto price tracking website Coinmarketcap. On the same day, the price of Ethereum touched lows of £1,250.

This effectively means that the world’s two biggest cryptocurrencies have lost more than half of their value since hitting their all-time highs.

Dogecoin, the meme coin popularised by Tesla CEO Elon Musk, has not been spared either. The cryptocurrency is now valued at around £0.15, way below its May peak of over £0.50.

Across the cryptocurrency market, many other digital assets have suffered similar losses.

Why are crypto prices falling?

The latest drops in crypto prices come on the back of a major clampdown on crypto trading and mining in China.

In May, the Chinese government effectively banned financial institutions and payment companies from providing services related to cryptocurrency transactions.

Under the ban, banks and online payments channels are prohibited from offering any crypto-related services, including account openings, registration, trading, clearing, settlement and insurance.

Furthermore, these institutions have been directed not to offer savings, trust or pledging services for cryptocurrency, nor issue financial products related to cryptocurrency.

It’s not just financial institutions that have been banned from handling crypto. China has also been coming down hard on crypto mining recently. Mining is the process by which new units of digital coins are created.  

China makes up a considerable part of the global crypto-mining infrastructure. Sichuan Province, which is one of the country’s largest cryptocurrency mining bases, is taking steps to stamp out the activity and many miners are now being forced to pack up their bags and go elsewhere. This follows similar moves in the Inner Mongolia and Yunnan regions.

According to a report in China’s Global Times, the recent moves are expected to shut down more than 90% of the country’s Bitcoin mining capacity. This, of course, has stakeholders in the crypto space concerned, and the result has been a market crash.

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Will cryptocurrency recover?

It’s impossible to tell. With the crypto market being so volatile, it’s difficult to predict what will happen next.

However, given the market’s history, it could be that it will stage a comeback at some point in the future. That said, nobody knows how long this could take.

Bear in mind that if the market does recover quickly, a subsequent fall may occur just as quickly. This is why investors are often advised not to invest all of their hard-earned money in crypto and instead only invest what they can afford to lose.

The good news is that there are numerous ways of investing that are far less risky. One is stocks and shares investing, which you easily can do from the comfort of your own home using a share dealing account or a stocks and shares ISA.

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