Why are cryptocurrencies and NFTs in free fall?

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After Wall Street’s tech stocks plummeted, there has been a sharp drop in crypto assets in recent days. Bitcoin even briefly dipped below $30,000…

Wind of Panic in the Cryptocurrency and NFT Market! After falling technology stocks on Wall Street since the beginning of the year, crypto assets have suffered a dramatic collapse in recent days. After bitcoin hovered around $40,000 for several months, bitcoin briefly dropped below $30,000 on May 10 for the first time since July 2021.

In its fall, Bitcoin is dragging other cryptocurrencies down, with Ether down 17% in seven days. The total market is therefore valued at just over $1,500 billion, compared to $3,000 billion at its peak, according to Coingecko, which has over 13,000 cryptocurrencies. Among the top 20 cryptocurrencies, almost all have been on a downward trend for three months, such as Bitcoin and Ethereum, which have declined by almost 25% over this period.

The situation is no better on the NFT side, which is also in disarray. Proof of this is Bored Ape Yacht Club’s most popular collection, featuring over 10,000 unique designs. According to the OpenSea platform, it lost 35% in a week. In just seven days, the average price of Bored Ape rose from just over $430,000 to almost $260,000. The situation is hardly more rosy for CryptoPunks, those little pixelated retro game characters that popularized NFT avatars. The latter are down almost 25% in one week and even more than 65% in the last 24 hours.

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Cryptocurrencies are now following the stock market

While the fall of NFTs follows cryptocurrencies into their fall, it is hardly surprising as these digital assets are the last to be supported, the fall of bitcoin and other virtual currencies in the wake of Nasdaq tech stocks is a slightly more unusual event, although the sector is accustomed to volatility cycles.

Thus, until 2020, the price of cryptocurrencies was decorrelated by the turmoil on Wall Street. But the introduction of bitcoin and crypto assets more broadly by financial institutions around the world has changed that. And this digital asset, which is on the sidelines of the global financial system, has thus begun to follow the dynamics of stock assets of the New York Stock Exchange. As technology stocks have been steadily falling since the beginning of the year, cryptocurrencies are following suit.

At the start of the war in Ukraine, the illusion that bitcoin would be a safe haven lasted for several days before the evolution of the stock markets finally followed. Moreover, the armed conflict in Eastern Europe is on a par with other events of international resonance, such as the resumption of the Covid-19 pandemic in China, the tightening of monetary policy in the United States, or runaway global inflation. There are so many elements that contribute to the unsettling atmosphere in the traditional markets that are becoming more and more unsettled. And that concern extends to other assets, such as cryptocurrencies, that are unable to withstand the current downturn.

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El Salvador on the verge of bankruptcy?

Apart from the reduction to zero or near-zero capital gains of some crypto-asset investors, this situation could prove even more dramatic for countries with strong ambitions in the field of 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) to recommend that the country abandon such a project.

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Fears intensify as the bond matures in January 2023, but with the collapse of the country’s foreign exchange reserves holding more than 2,000 bitcoin, bondholders are losing confidence and are now seeing the threat of default grow. And for good reason: the Central American country has yet to attract investors with its bitcoin-backed government bonds.

This was supposed to raise a billion dollars, in part, to finance a sovereign bond that is about to expire, and to build “Bitcoin City”, a city powered by a volcano, to mine cryptocurrencies. However, Salvadoran President Nayib Bukele does not give up and even just announced that his country bought 500 bitcoins at an average price of $30,744, taking advantage of the fall of the cryptocurrency. This amount remains at $15.3 million.

Greater risk aversion

This critical situation could last for several more months, while technology stocks, which soared in the stock market during the health crisis, are now the victims of a sharp market correction. Peloton is a symbol of this stock market crash: today it has a Wall Street capitalization of $4.3 billion, up from nearly $56 billion at its peak in January 2021.

Therefore, the cryptosphere must continue to suffer for some time before resuming its course to new heights. However, the current context has not affected Instagram, which has just launched NFT. But in the current period, with strong geopolitical and economic instability, investor risk aversion is especially strong. As a result, almost no one buys cryptocurrencies with a loss … except El Salvador.

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