Bitcoin’s Black Friday: Everything you need to know about the 2022 crypto crash

What’s going on with crypto prices right now?

Crypto’s market cap has plummeted $1.3 trillion since early November.

That’s after reaching an all-time peak of $3.1 trillion, meaning the crypto market has lost 42% of its overall value in under three months.

Yeah. It’s basically the Red Wedding of crypto.

But surely the most popular cryptos are doing OK?

Nope.

Bitcoin is not well. After peaking near $69,000 in November, the people’s crypto plummeted to below $33,000 on January 23rd – over 52% of its value gone.

Bitcoin’s price from October 24, 2021 to January 24, 2022, courtesy of CoinDesk

Even investor darling Ethereum, which has long been considered a more stable investment thanks to its versatility, couldn’t escape The Great Crypto Selloff.

After peaking near $4,900 in November, ETH traded in late January below $2,200. That’s over 55% of its value, vanished into the, dare I say, ether.

Ethereum’s price from October 24, 2021 to January 24, 2022, courtesy of CoinDesk

Investors are even selling off their DOGE, and for reasons I can’t quite articulate, that just hits harder. It’s like DOGE was supposed to be the childhood stuffed animal of crypto–something cute and innocent that you hold onto forever regardless of how “grown up” your portfolio gets.

But apparently not. Even DOGE is being left by the curb.

Dogecoin’s price from October 24, 2021 to January 24, 2022, courtesy of CoinDesk

Yep, it’s grim tidings in the world of crypto right now. Well, at least we have a steady stream of memes to help us get through it:

To me, self-deprecating investing memes are like a chocolate bar in a WWII K-ration; something sweet to get through a terrible situation.

So why after a record run in 2021 is the crypto market suddenly crashing?

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What’s causing crypto prices to free fall?

Well, it’s hard to pinpoint one specific thing–but I have some ideas.

You see, crypto’s value is 100% speculation. That makes it not only impossible to predict, but almost just as difficult to explain how and when a drop happens.

“From tulips to baseball cards to Beanie Babies, the problem with ‘assets’ based entirely on perceived value is that when perceptions change they no longer have value” David Hunter, CFA, CAIA, Director of Research and Investments at CPC Advisors told Investor Junkie.

The root cause of the crypto crash isn’t numerical; it’s psychological. A sudden shift in perception in late 2021 led to a massive selloff, which continues to this day.

So what could’ve caused investors to turn on crypto? It can be attributed to a mix of the following:

1. Rising inflation/interest rates
2. Russia’s pending crypto ban
3. El Salvador’s botched Bitcoin rollout
4. A mass selloff from COVID-era retail investors

Reason #1 - The fed Is raising interest rates

With inflation rising to its most unpleasant levels since 1982, the Fed has openly discussed raising interest rates at several key points in 2022.

And historically speaking, rising interest rates (or even the mere threat of them) has caused a dip in the stock market. Businesses begin spending/lending less, more holdings are converted from stocks to bonds, and retail traders simply have less capital to invest.

It doesn’t always happen this way–-sometimes rising interest rates can boost the stock market–but this time, it seems to be having the usual effect. Case in point, the S&P 500 is down 10% year to date.

So how does that affect crypto?

Rising interest rates generally instill a risk-averse mindset. With everyone from institutional investors to high-valuation tech companies to retail traders rebalancing their portfolios for less risk, mega-risk crypto holdings are often the first on the chopping block.

But an even more direct link between interest rates, inflation, and crypto prices comes down to you and me: the retail investors. Life is getting expensive in America, and with the price of eggs, cars, and houses spiraling upwards, there’s simply less money at the end of the month to invest in crypto.

Reason #3 - Russia’s pending crypto ban

When we zoom out to a global stage, we can see that Bitcoin inventor Satoshi Nakamoto’s original plan to replace world banks is not going well.

China really, really hates cryptocurrency, and practically wrote the international playbook on how to remove it from your country’s borders:

1. Ban trading
2. Ban mining
3. Introduce your own state-sponsored crypto

Now, Russia is following suit.

The Motherland has never been a big fan of crypto, but aside from banning it as a form of payment, it’s had a laissez-faire attitude towards mining and trading.

That all changed on January 20th, when the Russian Central Bank announced its intentions to ban all crypto activity within its borders.

It gets even worse for crypto’s PR team.

Unlike China, Russia went to great lengths explaining why they hate crypto and the rest of the world should, too. As reported in Reuters, they basically called it a giant, power-sucking pyramid scheme that threatened the very wellbeing of its citizens.

Oh, and that it gives terrorists an easy way to move money around.

Yikes.

Reuters also reported that as of August 2021, Russia accounted for 11.2% of the world’s hash rate – meaning that if a ban goes through, a lot of miners will have to pack up shop and move to a shrinking number of countries that allow mining.

The Russian Central Bank’s damning manifesto was clearly devastating to both crypto’s bottom line and its public image. A lot of countries are still undecided on crypto, so when a world superpower outright calls it Terrorist Venmo, it gives world leaders plenty to chew on.

The markets clearly reacted too. A national crackdown is one of the few tangible metrics that can accurately predict tomorrow’s crypto prices, so when Putin gave crypto the ol’ KGB judo chop, prices continued falling.

More: What is the future of bitcoin and crypto regulation?

Reason #3 - El Salvador’s botched Bitcoin rollout

What’s worse for the crypto market than a country hating on it?

A country loving on it, apparently.

Last year, El Salvador seized headlines by becoming the first country to start accepting crypto as legal tender. On September 7, 2021, Bitcoin became the second official state currency behind the U.S. dollar, which itself was successfully adopted in 2000.

To the crypto community, this seemed like a monumental victory – and a giant leap towards global acceptance. If China wrote the book on how to uproot crypto, maybe El Salvador could show other countries how to integrate it from the top down.

But so far, all we’ve gotten out of El Salvador’s bungled Bitcoin operation is a cautionary tale.

Just five months in, El Salvador’s Bitcoin rollout is “tanking the economy—and is a mess by every measure” writes Shawn Tully in Fortune.

The problems with adopting Bitcoin as a state currency began on day one, when El Salvadorians discovered that the remittance fees (read: transfer fees to/from El Salvador) for Bitcoin were more than triple what they were in USD.

Worse still, although Bitcoin hit a peak in October, prices have been tumbling since.

So to the average El Salvadorian, Bitcoin is just another dollar that might be worth $0.59 tomorrow. And when you live on less than $5.50 a day like 33% of the population does, a loss like that can be devastating.

As a direct result of the botched Bitcoin rollout, El Salvador’s 5-year credit default swap (CDS) has more than quadrupled, its national debt is selling for 36 cents on the dollar, and rumors are circulating that the Financial Action Task Force (read: the UN of financial crimes) may even step in before the country becomes a haven for money laundering.

Despite all this, President Nayib Bukele just spent $15 million more of the country’s money on 410 bitcoins. He also made an appearance on Twitter dressed in a McDonald’s uniform, referencing a common joke among crypto investors that they need a second job when the dip happens.

El Salvador was supposed to show the world all the reasons crypto could become a mainstream national currency. Instead, it perfectly highlighted all the reasons it couldn’t.

Reason #4 - COVID-era crypto investors can’t (or won’t) keep HODLing

Finally, and as hinted above, we’re likely seeing a mass selloff by retail traders who bought crypto during COVID-19, but who can’t (or won’t) hold on any longer.

One of the major pillars propping up crypto’s value is HODL. HODL originated from a drunked diatribe posted on BitcoinTalk in 2013, where user GameKyuubi scolded “weak hands” for selling Bitcoin too early.

In the subject line, he proudly proclaims “I AM HODLING.”

From that moment onwards, HODL became the unofficial motto of crypto investing. It even got its own backronym: Hold On for Dear Life.

So, early crypto investors like GameKyuubi and his ilk would HODL for years, seeing their investment pay off over 1000 times over.

Then, COVID happened.

With 29% of American households reporting “worsened” finances as a result of the pandemic, many flocked online to seek a quick, easy way to multiply their money and make up for lost income.

At that point, all roads led to crypto. Values were surging, Coinbase made it convenient to buy, and Uncle Sam had just given everyone $1,400 to buy it with. So 1 in 10 Americans used their stimmy check to buy crypto, according to a Harris Poll.

But here’s the thing; I sincerely doubt that a vast majority of COVID-era crypto investors ever had intentions to HODL. They weren’t diehard crypto stans like President Bukele – they were just normal people trying to make ends meet, and saw crypto as a place to safeguard their American Dream.

If crypto investing is like war, the wave of COVID-era investors were like conscripted militia. They held the front line for as long as they could, but now that the battle is getting tough, their lines are starting to break.

And who can blame them? They’re not professional soldiers like the long-term HODLers–they’re just trying to protect their land and their families.

So should I buy or sell my crypto?

How should investors take advantage of the current crypto crash?

If you currently hold crypto, is now the time to sell before your holdings lose even more value?

Or, conversely, is now the time to buy more while crypto is figuratively half off?

You might be feeling FOMO, but remember; FOMO isn’t an investing strategy.

Investing should be cold and calculated–not frenzied and FOMO-induced. Before investing in cryptocurrency, keep in mind that it’s a mega-risk asset. It’s literally so risky that most Wall Street firms won’t let their clients buy it because they can’t fit crypto into an asymmetric risk profile (aka a portfolio design principle where the house always wins).

If you do buy the dip, only buy what you can afford to lose. Bitcoin could be $1,000 or $100,000 by the end of the year, and that’s how it’s always been. To assume that Bitcoin or Ethereum will rally back to their peaks would be a fallacy; the gambler’s fallacy, to be specific.

More: How to invest in cryptocurrency

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Will crypto prices recover?

If you ask me, there are more trends pointing towards crypto’s eventual downfall than its triumphant recovery.

• Its first experiment as legal tender has been a disaster
• Its ecological impact is horrifying–and Ethereum 2.0 is nowhere in sight
• Three of the world’s five great superpowers (China, Russia, and India) have already banned it to various degrees
• The Fed has inadvertently discovered a way to torpedo the crypto market virtually overnight through the mere threat of rising interest rates

But I think the primary reason crypto will fail as an investment is because it was never intended to be an investment in the first place. It’s a square peg in a round hole.

If you read Satoshi Nakamoto’s original 2008 whitepaper on Bitcoin, you’ll notice that he/she/they spend most of the text discussing the merits and design of blockchain technology. Bitcoin was just the vessel for proving how blockchain could world, and it did work.

But it’s painfully clear that Nakamoto never intended Bitcoin to be an appreciating asset. Quite the opposite, it was supposed to be the first stablecoin–a non-volatile store of value that could be easily transferred across international borders.

Besides, how could blockchain technology replace world banks and trusted third parties if Bitcoin was worth $1.06 when it was sent, and $0.91 when it was received?

Nakamoto didn’t turn Bitcoin into an investment: we did. Perhaps the only thing missing from his otherwise leak-proof blockchain design was a safeguard against Bitcoin’s value spiraling out of control. Without that safeguard in place, simple economics took over almost immediately:

Limited supply + rising demand = rising prices

Bitcoin’s greatest contribution to society is proving that blockchain works. In 20 years, I think we’ll look back at blockchain as Internet 2.0–a technical revolution that changed us all–and crypto investing as a meme that spiraled out of control.

Bitcoin’s legacy will be that it made thousands rich and millions poor. I’d much prefer that you follow a strategy that’s simply making millions rich (albeit a bit slower). Check out our suggestions on other ways to invest money wisely.

The bottom line

It’s hard to pinpoint the exact root cause of The Great Crypto Selloff of 2022, but certain trends are undoubtedly playing a role. A mass exodus of COVID-era retail investors, rising interest rates, and Bitcoin’s flailing public image are all pushing prices downwards.

The takeaway for investors should be this: volatility goes both ways. Not everyone makes money on crypto, especially in the short-term, and there are reasons why seasoned investors stay away from it. It’s not bitterness; it’s experience.

Does the concept of crypto have merit? Yes. Does blockchain have merit? Absolutely. Should you invest in cryptocurrency? Probably not.