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Watch | Why do cryptocurrencies crash?

Bitcoin and many other cryptocurrencies have been crashing since they hit an all-time high late last year. In November 2021, Bitcoin was valued at $69,000. But currently it is at $22,000. Ethereum has lost almost 80% from its peak.

The overall market capitalisation of cryptocurrencies has dropped under $1 trillion for the first time since January 2021.

Analysts believe that the current crash parallels the fall in value of stocks and other assets. This is a result of the strict monetary policies that central banks have deployed to fight inflation. When these banks reduce the funds available in the market with high interest rates, there’s less money available to be spent on assets such as cryptocurrencies.

Many countries have also taken several steps to discourage the widespread use of cryptocurrencies.

While countries such as China and Russia have outright banned cryptocurrencies, others such as India are trying to tax and regulate them heavily.

In the 2022 budget, our government imposed a 30% tax on all virtual digital assets.

Both Central banks and governments have reasons to be wary of cryptocurrencies. These currencies challenge the control that central banks have over a nation’s currency and the ability of governments to fund their programmes by creating fresh money.

Cryptocurrencies have inherently gone through a lot of fluctuations - they crash and pick up. Whenever a market crashes, there’s a lot of panic selling of the assets. This applies to the crypto market as well. In the past, many crypto enthusiasts have been rewarded by these purchases. They believe that like gold, crypto assets offer protection from price inflation.

Sceptics on the other hand believe that these currencies have no value in the everyday economy. As a result, they fear that investors will not be able to hold on to the gains if any. They believe that this crash may be the end of the road for cryptocurrencies.


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Printable version | Aug 5, 2022 8:25:28 pm | https://www.thehindu.com/business/markets/watch-why-do-cryptocurrencies-crash/article65572154.ece