Why are cryptocurrencies and NFTs in free fall?

Why are cryptocurrencies and NFTs in free fall?

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In the wake of plummeting tech stocks on Wall Street, crypto-assets have suffered a dramatic crash in recent days. Bitcoin even briefly dipped below $30,000…

Wind of panic on the cryptocurrency and NFT market! In the wake of tech stocks tumbling on Wall Street since the start of the year, crypto-assets have suffered a dramatic crash in recent days. After hovering around $40,000 for several months, bitcoin briefly dipped below $30,000 on May 10, the first since July 2021. The peak at $69,000 last November now looks good. far !

In its fall, bitcoin is dragging down other cryptocurrencies, with ether falling 17% in seven days. The total market is thus valued at just over 1,500 billion dollars, compared to 3,000 billion at its peak, according to data from the Coingecko site, which compiles more than 13,000 cryptocurrencies. Among the 20 largest cryptocurrencies, almost all have been on a downward trend for three months, like bitcoin and ether, which have declined by nearly 25% over the period.

It’s no better on the NFT side, which is also in disarray. Proof of this is with the most popular collection in the sector, Bored Ape Yacht Club, which includes 10,000 unique designs. It lost 35% in one week, according to the OpenSea platform. In just seven days, the average price of a Bored Ape went from just over $430,000 to nearly $260,000. The situation is hardly more rosy for CryptoPunks, these little pixelated characters from retro games who popularized avatars in NFTs. The latter have dropped by almost 25% in one week, and even by more than 65% in the last 24 hours.

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Cryptocurrencies now follow the stock market

While seeing NFTs follow cryptocurrencies in their fall is hardly surprising, insofar as these digital assets are backed by the latter, seeing bitcoin and other virtual currencies sink in the wake of Nasdaq technology stocks is a somewhat more unusual event, although the sector is used to cycles of volatility.

Until 2020, the price of cryptocurrencies was thus decorrelated from the upheavals of Wall Street. But the adoption of bitcoin, and crypto-assets more broadly, by financial institutions around the world has changed that. And this digital asset, which is on the margins of the global financial system, has thus begun to follow the dynamics of the stock market assets of the New York Stock Exchange. As the technology stocks it hosts have been falling steadily since the start of the year, cryptocurrencies are following suit.

At the start of the war in Ukraine, the illusion of bitcoin becoming a safe haven lasted for a few days, before finally following the evolution of the stock markets. Moreover, the armed conflict in Eastern Europe comes on top of other events with international resonance, such as the rebound of the Covid-19 pandemic in China, the increasingly tough monetary policy in United States or runaway global inflation. So many elements that contribute to an anxiety-provoking climate on the traditional markets, which are showing themselves to be more and more worried. And this concern is spreading to other assets, such as cryptocurrencies, which are failing to counter the current slump.

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El Salvador on the brink of bankruptcy?

Beyond reducing to zero or almost the capital gains of certain investors in crypto-assets, this situation could prove to be even more dramatic for countries with strong ambitions in virtual currencies. This is the case of El Salvador, which adopted bitcoin as legal tender in September 2021, despite pressure from the International Monetary Fund (IMF), which recommended that the country abandon such a project.

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Fears are heightened as a bond matures in January 2023, but with the country’s currency reserves collapsing, which holds more than 2,000 bitcoins, bondholders are losing confidence and now see s raise the specter of default. And for good reason: this Central American country has still not attracted any investors for its government bond backed by bitcoin.

This was to make it possible to obtain a billion dollars, in particular to finance the sovereign bond which is soon to expire and to build “Bitcoin City”, a city powered by the energy of a volcano for the mining of cryptocurrencies. However, the President of El Salvador, Nayib Bukele, is staying the course and has even just announced that his country had bought 500 bitcoins at an average price of $30,744, taking advantage of the fall in the cryptocurrency. This still represents a sum of $15.3 million.

Greater risk aversion

This critical situation could last for several more months, while technology stocks which had risen sharply on the stock market during the health crisis are currently victims of a violent market correction. Peloton is the symbol of this stock market meltdown, with $4.3 billion in capitalization on Wall Street today, compared to nearly $56 billion at its peak in January 2021.

The crypto-sphere should therefore continue to suffer for some time, before resuming its course towards new heights. However, the current context has not dampened Instagram, which has just launched into NFTs. But in the current period, with strong geopolitical and economic instability, investors’ risk aversion is particularly strong. As a result, almost no one buys cryptocurrencies on the downside… except El Salvador.

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