The cryptocurrency market crashed on May 19, with major currencies losing almost 30% within 24 hours, as China announces a ban on cryptocurrency transactions.
Reasons for the Cryptocurrency Market Crash
Leading cryptocurrencies like bitcoin and ethereum fell almost 30% in a single day. China's ban on cryptocurrency transactions had brought the fall.
Earlier, Elon Musk's tweet that cryptocurrencies will not be accepted for car payments, was the first reason for the fall in cryptocurrencies. The cryptocurrency has surged sharply in 2021 and was due for a correction. The ban by China was the last straw to the cryptocurrency crash. All the factors together had contributed to the fall in the crypto market.
It was a contribution of several factors that led to the cryptocurrency crash. The extremely volatile movement in the crypto market has led to uncertainty, as investors lost most of their investments money with prices moving lower.
China Tightens Crypto Regulations
China has banned financial and payment institutions from accepting, transferring, or lending on cryptocurrency transactions. Bitcoin mining involves the usage of a lot of fossil fuel, which is damaging the environment, says China. The crackdown on cryptocurrencies has been on since 2019 in China. But investors have been trading in cryptos through online platforms.
On Tuesday, May 19, The China Banking Association, the National Internet Finance Association of China, and the Payment and Clearing Association of China have warned investors on cryptocurrency transactions to be banned. It is a violation of asset safety, they said. It led to a sell-off, wiping out a large amount of investor money, as panic selling was seen in major cryptocurrencies like bitcoin, ethereum, and Dogecoin.
China has issued a ban prohibiting payment companies and financial institutions to provide services to cryptocurrency-related transactions. Earlier in 2017, a similar ban was issued by the government.
Elon Musk on Environmental Toll of Mining Cryptocurrencies
Elon Musk is famous for his tweet to bring volatility into the crypto market. He had sent a series of tweets last week on the effects of crypto mining on the environment on May 13, 2021. The prices of Bitcoin and Ethereum have been stumbling lower, as they are under pressure from the tweets of Musk.
Tesla CEO Elon Musk has announced that his electric car-making company will not accept Bitcoin as payment for any vehicles. Just a few months earlier, he had announced that his company would accept cryptocurrencies as payment.
Musk has clarified that the mining of bitcoin was causing heavy damage to the environment. The creation of bitcoin requires a lot of electricity, says Musk. However, he tweeted again, that once mining is shifted to another sustainable energy source, he would reinstate cryptocurrency transactions. It helped Bitcoin prices to recover some losses on Wednesday, as prices moved higher after hitting a low of $30,260. It has recovered to around $40,000 on Thursday, May 20, 2021.
Safety Vs. Risk Appetite
Short-term profit booking has also contributed to the volatility in the market. While some investors are booking profits, some are buying the dip. Investors are willing to put in money, as they want to "bottom-fish" at lower prices. However, most analysts have warned investors to stay aside for the moment.
Large price swings are a part of cryptocurrency trading. Investors should be prepared for such volatility, as cryptocurrencies are risk asset class say, experts.
The crypto market almost lost $1 trillion in market capitalization on Wednesday. The break or make volatility is a nightmare for traditional investors. Traditional investments provide a safe return to investors, especially on their long-term investments. But large volatile swings are a part of crypto markets, which crypto investors understand.
The crash in the crypto market sent investors rushing to exit their position. WazirX, India's cryptocurrency exchange, crashed from the deluge of investors trying to sell their position on Wednesday. The dip in prices also brought in fresh investors who wanted to buy on dips.
Sharp Decline in Major Crypto Prices
On Wednesday, May 19, bitcoin prices fell almost 29% after China banned cryptocurrency transactions. Ethereum fell almost 40% on the same day.
Bitcoin went to a record high value of $64,900 on April 14. On May 19, its value slipped to almost $30,260. The sharp fall in bitcoin was to be expected, as prices have gone up sharply in 2021, say experts. At the beginning of January, bitcoin prices were at $27,000.
Ethereum was trading at $750 at the start of the year. It zoomed higher to around $4,175 on May 11. But the recent crypto crash has caused the ETH/USD to fall to $2,500 on May 19.
Bitcoin volume has shot up in 2021. It has gone up from $271 million in 2020 to $545 million per day in 2021.
The risks associated with cryptocurrencies have to be understood by investors, say experts. Returns on cryptocurrencies are higher but are very volatile. It is the right investment for investors with a high-risk appetite. Investors are best advised to take away profits when they see prices surging higher.
The demand for Blockchain technology is increasing, and the crypto market will rebound again. Volatility in the crypto market is expected, and investors should not panic, say experts.
