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10.August 2022

Crypto bubble is bursting. Will cryptocurrency prices recover?

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A closer look at the cryptocurrencies industry shows that most of them have crashed from their record high in 2021. 

Bitcoin has dropped from almost $70,000 in November last year to just $24,688 today. Similarly, Ethereum has plummeted from almost $5,000 to the current $1,260. Cardano has also dropped from about $3 to $0.4459. The same is true among other cryptocurrencies like Solana, Avalanche, Dogecoin, and Solana.

In total, cryptocurrency investors have lost over $2 trillion in the past few months. In contrast, investors lost about $5 trillion during the dot com bubble.

There are several reasons why the crypto bubble seems to be bursting. First, this decline is a sign of rebalancing considering that cryptocurrencies were highly overvalued in 2021. For example, meme coins like Shiba Inu, Dogecoin, Safemoon, and Dogelon Mars were being valued at billions of dollars. 

Second, the crypto bubble is bursting because of the current new normal in the financial market as the Fed seems focused on fighting inflation. Data published last week showed that the country’s inflation jumped to a 40-year high of 8.6%. Therefore, with the unemployment rate, there is a likelihood that the Fed will continue hiking rates this week.

Third, there are concerns about the key sectors of the blockchain industry like NFTs and Decentralized Finance (DeFi). DeFi has seen its total value locked (TVL) drop by more than 42% while NFT volume has been in a strong downward trend. The most recent crash of Terra’s ecosystem has contributed to the sell-off.

Therefore, many crypto holders are wondering whether this crypto bubble will recover. It is hard to say whether cryptocurrency prices will bounce back soon. 

Still, there is one major reason why some of these coins will bounce back. This is the fact that cryptocurrency prices have been highly correlated to equities. 

On Friday, the Dow Jones and Nasdaq 100 indices declined by more than 880 and 414 points, respectively. The trend has continued, with futures tied to the indices falling by 592 and 340 points, respectively.

Therefore, the crypto crash is not an isolated event. While the decline will likely continue in the coming months, it will also bounce back when stocks recover. Historically, stocks tend to stage a recovery after falling sharply.

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