The crypto market lost more than $500 billion in combined market cap on Friday. The market bloodbath resulted in a sell-off of over $700 million as major crypto assets tumbled heavily. Bitcoin (BTC) fell below the critical $40,000 support level, while Ether (ETH) also lost support at $3,000.
At a time when crypto advocates are debating whether the crypto market has entered a bear phase, many wild theories have flooded the internet to make sense of the decline.. We will look at three such theories that many believe fueled the crypto market crash.
Federal Reserve inflation measures:
Consumer inflation in the United States has hit record levels and new interest rates are expected to be announced at the next FOMC meeting scheduled for January 25-26. The Fed is expected to hike interest rates three times this year, with increases of between 0.25% and 1% by the end of the year. Many market insiders believe that growing concerns about inflation, added to the rise of Omicron, led to a sell-off on Wall Street that eventually trickled down to the cryptocurrency market.
One Reddit theory suggests that cryptocurrencies were created to hide asset inflation, as they created another “pipeline” for the US dollar to flow through to inflate another asset. User Juicyjuicejuic wrote:
“Cryptocurrencies create the perfect trading vehicle for a brief period before becoming the scapegoat for an impending crash.”
The user added that the volatility in the cryptocurrency market is why “bonds and stocks crash because everyone has been betting on cryptocurrencies and taking money from other assets to do so.”
The growing correlation of the bitcoin market with Wall Street
Market experts also believe that Bitcoin’s growing correlation with the stock market may have caused the decline earlier. BTC is more intertwined with stock markets through ETFs and institutional investors. The cryptocurrency market has been rocking at the same pace as Wall Street.
Proposal for a blanket ban on cryptocurrencies by the Central Bank of Russia
Another theory that seems to have gained traction is a recent report by the Central Bank of Russia calling for a blanket ban on cryptocurrency mining and trading. As Cointelegraph reported, The Central Bank of Russia compared Bitcoin to a pyramid scheme and called for an immediate nationwide ban on its use. The central bank also warned that cryptocurrencies could pose a risk to the nation’s financial sovereignty.
Russia became the third largest bitcoin mining hub and many believe that the central bank’s call for a blanket ban triggered May 2021 as a FUD in the market, prompting a sell-off.
The first major drop in 2022 has resulted in a sell-off in the cryptocurrency market; however, experienced traders continue to advocate hodling, stating that a drop of up to 30% in a bull market is not a problem.