Why is crypto dropping? Bitcoin, Terra and Ripple suffer as ‘victim of own success’

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The crypto sector hit highs of about $3 trillion in total assets last November but that has plunged to less than $1 trillion now. The price of cryptocurrencies including Bitcoin can fluctuate due to changes in supply and demand, as well as speculation about price changes.

Why is crypto dropping?

Bitcoin was trading at $64,000 per coin in November but right now investors can get their hands on the cryptocurrency for about $21,000 (£17,000).

And the current crisis has similarities to the 2008 financial crash which had lasting consequences felt around the world.

Part of the problem in 2008 was the inability of lenders to meet margin calls – a demand by a broker for investors to deposit cash or securities to cover possible losses.

Crypto’s equivalent took place when firms announced difficulties after their digital-asset prices dropped.

Celsius Network, Babel Finance and Three Arrows Capital shared news of their troubles and this triggered a crunch with resources short and demand high.

This is not the first time cryptocurrencies have experienced a major drop but experts are saying there is reason to be worried this time around.

Jason Urban, co-head of trading at Galaxy Digital Holdings Ltd., explained in an interview that the drop is as much about the success of crypto as anything else.

He said: “It’s got a different flavour this time … Truthfully, it’s being a victim of your own success.”

Terra is a blockchain protocol and payment platform formed in 2018 that is caught in the drop.

It describes itself as one of the most ‘decentralised chains ever launched’ and many invested in it for its more predictable prices.

And speculation about crypto prices is one of the reasons they are falling now – at an even quicker rate than they initially rose.

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A poorly performing crypto market is called a crypto winter and is similar to a bear market in stock markets – when there is a prolonged drop in investment prices.

John Griffin, a finance professor at University of Texas at Austin, told Bloomberg that interest rates and a lack of trust in leveraged platforms, such as apps that allow small amounts of capital to gain access to larger markets, are part of the problem.

He said: “With interest rates rising as well as lack of trust in leveraged platforms, this de-leveraging cycle has the effect of unwinding these prices much more rapidly than they rose,”.

The crypto market is now just above the $830 billion it was worth in 2018 before the last winter set in.

But now, the range of investors is much wider and appeals to individual investors as much as hedge funds.

That means the future of crypto is harder and harder to predict as the market becomes more complex.

The only thing that is certain is crypto – like much of world finance right now – is going through a dark phase.

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