Why is the crypto market down today?

In the words of Crypto Twitter traders, the market is “down bad” today. And with the daily close approaching (in candlestick-chart terms), it looks like the sell-off in Bitcoin (BTC) and altcoins is far from over. 

On Nov. 9, Bitcoin price dropped to a new yearly low at $16,661, bringing the price back to levels not seen since November 2020 when the bull market that catapulted BTC to an all-time high of $69,400 first began.

JUST IN: Over $200 billion was wiped out from the global #cryptocurrency market in the past 48 hours. pic.twitter.com/jyVZLbXy2s

— Watcher.Guru (@WatcherGuru) November 9, 2022

Concerns over FTX’s solvency and the role prop trading firm Alameda Research might have played in the debacle remain the primary catalyst behind the current market bloodbath. There are also rumors that FTX’s balance sheet hole could be as large as $6 billion.

FTX’s hole could be as high as $6bn

Wow

— Frank Chaparro (@fintechfrank) November 9, 2022

Currently, investorsare ramping up their risk-off approach to crypto assets now that it is clear that Binance will not purchase the beleaguered exchange.

Here is an official statement from Binance:

“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com. In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help. Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market. As regulatory frameworks are developed and as the industry continues to evolve toward greater decentralization, the ecosystem will grow stronger.”

What is clear is that the implosion of FTX and Alameda is having a devastating impact on crypto prices, but there are other more macro-level factors also leaning on crypto prices.

Fears of a bank run and contagion spook the market

The May 2022 Terra bank run and ultimate collapse of LUNA — since rebranded LUNA Classic — reverberated through the cryptocurrency market, at the time bringing about the first seven-week losing streak in Bitcoin’s history.

Analysts are drawing parallels between the current FTX bank run, the perceived large budget hole and what happened to Terra earlier this year. These fears are adding to investors’ fears about the cryptocurrency industry at large. 

The persistent threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets.

Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.

The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.

Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.

After the FTX debacle, regulators may begin to step up strict enforcement, as signaled by Germany announcing it is looking into Coinbase’s business practices.

Scams and Ponzis triggered liquidations and repeat blows to investor confidence

Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.

The implosion of Terra’s LUNA and Celsius Network as well as the misuse of leverage and client funds by Three Arrows Capital (3AC) were each responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.

As the Terra and LUNA ecosystem collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring within Terra — and investor sentiment tanked.

The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, erasing tens of billions in investor and protocol funds.

Related: Galaxy Digital discloses $77M exposure to FTX, $48M likely locked in withdrawals

What to expect for the rest of 2022 through 2023

The factors impacting falling prices within the crypto market are driven by FTX’s capital crunch, coupled with investors’ fears from previous insolvencies.

In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked and for the regulatory environment to become more clear.