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Several major cryptocurrencies suffered heavy losses early Monday as the market’s valuation plunged to nearly $900 billion.
Bitcoin plunged from about $19,450 to just over $18,400.
Ethereum smashed below $1,300 and bounced around for hours.
Other big names like cardano, dogecoin and solana all shed around 5-7%, while shibu inu and ethereum classic relinquished some 10%.
The newly-minted ETHPoW coin fared worst, shaking off nearly half its valuation in just hours.
By 11pm EST, the worst of the day’s carnage had ceased. The global crypto market cap rose from some $914 billion to hover around $940 billion as market wariness petered.
Bitcoin recovered to around $19,460, minimizing its weekly decline to just 12.7% as its 24-hour gains topped 3.2%. Ethereum regrouped at $1,365, rising 4.5% in the prior 24 hours despite plunging 20% in the last 7 days. The rest of the market largely stabilized, though some volatility was present late into the evening.
What made Monday unusual is that the market lacked a unifying explanation for the day’s destruction. That leaves investors wondering: why is crypto crashing today – again?
Experts largely believe the answer for Monday’s cryptocurrency pop lies scattered across 2022’s timeline.
Declining macroeconomic conditions—including decreased market support from the Fed, higher interest rates and the ongoing Russia-Ukraine conflict—have all played their part in this year’s volatility.
Repeated reports of stubborn CPI inflation data, including August’s, have panicked investors worried about fading purchasing power and looming recession. Many fear that the Federal Open Market Committee will use August’s inflation and jobs data to justify a higher-than-expected rate hike this week.
Since January, risky assets like stocks and cryptos have suffered, while the Nasdaq Composite remains entrenched in a bear market. Bitcoin and ethereum have both plunged over 60% since January.
But the long-running and highly anticipated nature of these events doesn’t fully explain why crypto took a sudden nosedive with no new information.
Enter “The Merge.”
Ethereum’s blockchain merge, or just “The Merge,” was a long-awaited event in the crypto world. The Merge moved Ethereum from an energy-intensive proof-of-work consensus mechanism to a more environmentally-friendly proof-of-stake mechanism. The details are a bit technical, so we’ll only look at the basics. (You can explore in greater detail here.)
Prior to last week, Ethereum relied on a proof-of-work (PoW) consensus mechanism to verify transactions, mint coins and secure the network. PoW relies on a network of computers, or nodes, racing to solve complex math puzzles. The first to cross the finish line adds a block to the blockchain and may receive a reward (usually crypto).
PoW has been scorned as wastefully energy-intensive, as only one node can actually secure the block. “The Merge” aimed to change that.
In moving to a new proof-of-stake (PoS) model, Ethereum now requires validators to stake (hold) their ether on the blockchain to process transactions. By cutting out unnecessary computing power, the new process could slash Ethereum’s environmental impact up to 99.99%.
From a tech perspective, the Merge – which completed last week – was a success hailed as progress in the crypto community.
But some blockchain participants (namely large mining operations) were less thrilled, as the PoS mechanism heavily reduces their profit potential. Several coins forked away from Ethereum or established elsewhere, leading to concerns that the crypto market was becoming more saturated.
These concerns may have contributed to last week’s crypto volatility, which then spilled over into Monday’s trading session. Ethereum prices also dropped as traders “sold the news” surrounding the merge, prompting increased trading and price fluctuations.
But the merge itself, while exciting and trade-worthy, may not fully explain Monday’s volatility. However, an unintended consequence of its completion could. To understand, we have to explore the dirtiest word in a crypto trader’s vocabulary: regulation.
Gary Gensler, Chairman of the Securities and Exchange Commission (SEC), said that Ethereum’s upgrade to a proof-of-stake mechanism could classify it as a security and thus put it under its jurisdiction. As such, Gensler warned, cryptocurrencies qualify as securities that require government regulation – a filthy word to “true” crypto believers who hold blockchain’s decentralized tech should remain free of outside influence.
Let’s explain.
The SEC uses the Howey test to determine whether an asset counts as a tradable security. Under this threshold, a security is any “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Some have argued that crypto’s reliance on a network of privately operated computer nodes qualifies as “efforts of others.” But according to Gensler, Ethereum’s move to PoS – which requires private investors to stake their own funds – solidifies the designation.
“From the coin’s perspective,” he said in a statement, “that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.”
Gensler also noted he wasn’t singling out a specific currency, reiterating his belief that “the vast majority” of cryptocurrencies qualify as securities. Further, as securities, “these transactions must be registered or made pursuant to an available exception.”
And, in a blow to major crypto exchanges, Gensler added that any crypto platform that offers staking services “looks very similar—with some changes of labeling—to lending.”
In other words: while crypto enthusiasts use big words and high-tech equipment, a security by any other name can be regulated just as sweet. With the specter of potential regulation on the horizon—a big no-no for true crypto believers—some holders have already sold out, likely contributing to why crypto is crashing today.
But Ethereum isn’t the only coin facing the gauntlet of government regulation.
Way back in March, President Joe Biden signed an executive order for the White House Office of Science and Technology to investigate the impacts of digital assets. Of particular interest is bitcoin, which is estimated to consume 0.55% of the globe’s electricity production annually. (For reference, that’s about how much the entire country of Sweden uses in a year.)
Fast forward to early September, and the Office of Science and Technology has released their assessment: get clean – or get out.
More specifically, the Office of Science and Technology stated that: “Electricity usage from digital assets is contributing to [greenhouse gas emissions], additional pollution, noise and other local impacts…. The U.S. government has a responsibility to ensure electric grid stability, enable a clean energy future and protect communities from pollution and climate change impacts.”
To meet these goals, the Office recommends creating clean energy performance standards for crypto mining to reduce ongoing pollution. But, the report notes, “should these measures prove ineffective at reducing impacts, the [Biden] administration should explore executive actions, and Congress might consider legislation, to limit or eliminate the use of high energy intensity consensus mechanisms for crypto asset mining.”
This report also mimics earlier sentiments out of the EU, where the European Commission discussed banning bitcoin’s PoW mining mechanism based on its filthy environmental footprint.
In laymen’s terms: for a community that despises regulation and government intervention, bitcoin is wading into the thick of it – and its price is suffering as a result.
But, again, that’s not all.
These most recent findings and statements come amid a slew of White House reports that urge regulators – notably the SEC and Commodity Futures Trading Commission (CFTC) – to regulate cryptos more tightly.
Even Treasury Secretary Janet Yellen has staked her place in the debate, noting in a press conference that, “The reports clearly identify the real challenges and risks from digital assets used for financial services. If these risks are mitigated, digital assets and other emerging technologies could offer significant opportunities.”
Mrs. Yellen also added that “Innovation is one of the hallmarks of a vibrant financial system and economy, but as we’ve painfully learned from history, innovation without adequate regulation can result in significant disruptions and harm to the financial system and individuals.”
Together, these claims could lend weight to the SEC’s arguments as it fights to regulate the broader crypto industry. And it’s highly unlikely that these recent statements and events, alongside The Merge, didn’t impact Monday’s crypto prices.
Seasoned crypto investors know by now that volatility is expected. Big dips are common, as both Bitcoin and Ethereum have halved their peak value more than once.
For those who plan to invest in crypto long-term, a buy-and-hold strategy may be the best bet. However, as a new, unregulated and wildly volatile asset, most experts recommend limiting crypto exposure to 5% of your total portfolio. (Or no more than you’re comfortable losing in a downswing.)
Doing so ensures that you don’t have to eat enormous losses anytime the market swings, and that you can “set and forget” your portfolio more comfortably. And for investors who see this latest dip as a potential buying opportunity, limiting future losses is almost always sage advice.
On the other hand, if you feel crypto is too volatile for your taste, you may prefer more traditional assets. Alternatively, you may want to drastically limit your exposure while still putting some money in. For these investors, diversifying with crypto-related stocks and funds may make more sense.
Above all: if you’re an antsy investor determined to stay put, keep your nose out of your performance page. Tracking your progress too closely makes it more likely that you’ll invest on emotions, rather than strategy and logic. Often, letting volatility run its course is a better bet than trying to time the market or cashing out your losses.
Crypto seems to be moving for all the reasons at once – but ultimately, today’s crash will likely be a drop in the bucket of the asset’s history. Still, we understand why crypto investors get nervous when the market moves without solid grounding.
Fortunately, we can shake out some of those nerves with our AI-backed Crypto Kit. No, we can’t eliminate market volatility or guarantee gains. (And you shouldn’t listen to anyone who says they can.)
What we can do is use the power of AI to make the most informed, up-to-date plays available, and provide that investing power to you – free of charge.
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