What Can a Crypto Market Downturn Lead to?

The volatile nature of cryptocurrencies is an open secret, making many businesses shy away from adopting them as a payment channel. In the iGaming scene, for instance, while cryptos have been widely adopted for loading bankroll and cashing out payouts, not all platforms have embraced them. Top-tier gaming sites like Vegas casino are yet to include it among the fast and secure payment channels currently available, perhaps due to this volatility. That’s because volatility means that one day the currency is peaking, and the next day it could be wiped out of existence.

In a recent email to company staffers, Coinbase’s CEO, Brain Armstrong, announced that the tech company would let go of 950 employees. This difficult decision was reached to try and weather the storm of recent downturns in the crypto market. And this is just one example of the impact of a tumble in the crypto market. So today, we dig deeper into the devastation that crypto market downturns lead to and what causes these negative market movements in the first place.

What Causes a Crypto Market Downturn?

As we’ve already mentioned, crypto prices are highly unstable. They can dramatically be affected by different factors in and out of the crypto market may. So, it could be a collapse of an exchange company or factors like inflation and high-interest rates.

When the Crypto Prices fall as they did in 2022, investors demand their cash back to meet other obligations. For instance, the FTX crash affected not only the company itself but also the cryptos in which FTX had a stake and the businesses in bed with the company.

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Has This Happened Before?

Market collapses are a common occurrence in the crypto world. For instance, Bitcoin, the world’s most popular cryptocurrency, recorded a high of nearly $20,000 in December 2017. But then, a year later, in December 2018, its value was wallowing in the pits of misery with a paltry value of $3,500. Some of the other significant nosedives of Bitcoin’s value include:

  • June 2011. This crash occurred when Mt Gox, an exchange that at the time handled over 70% of Bitcoin transactions, was hacked. The cryptocurrency would close the year at under $5 from a previous high of about $550.
  • December 2013. Bitcoin’s price dropped after China issued a warning against the usage of Bitcoin as a legal tender. Bitcoin’s value slipped from $1,200, shedding off 50% of its value to $600.
  • December 2017. Bitcoin joined other cryptos in losing value from a high of $20,000 to $12,840 barely a week later.
  • March 2020. Like many other industries, the crypto market was hit hard by the COVID-19 pandemic. This would see Bitcoin’s value drop to $3,867 after having traded at $10,000 barely a month before.

So, what happens after such plummets in the crypto market?

  • Crypto Companies Lay Off Employees

Amidst the scourge of a crypto market downturn, the first thought process of crypto markets across the board is to look for ways to cut spending. That’s because investors at that time usually seek to get rid of assets that they deem risky. One of the ways to cut costs is to lay off employees.

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That said, Coinbase isn’t the only crypto company currently laying off workers. Crypto lender BlockFi is also cutting 20% of its staff as it grapples with a downturn in digital currencies and increased concerns about the state of the economy. Another Crypto company, Crypto.com, announced that it would be letting go of 260 people, while Gemini also announced that it is letting go of 10% of its workforce.

  • The Collapse of Crypto Companies

A crypto market downturn can lead to a contagion of crashes from one crypto company to the next. A few weeks after the Terra Luna crash in 2022, for instance, Three Arrows Capital, a Crypto hedge fund based in Singapore, collapsed. The domino effect of this company’s crumble would later lead to a slump in other crypto companies, which at the time included BlockFi, Celsius, Genesis, and Voyager.

  • Sparking Fear of Wider Recession

As you can imagine, a dip in the cryptocurrency market spooks investors, and they may end up wiping away tons of money that could potentially be used for investment. Retail tycoons, for instance, are known to invest widely in major crypto projects as safe investments. Such scenarios only broaden the belief that the crypto market slide may trigger yet another recession, which could last longer than previous ones.

Bottom Line

Crashes in the cryptocurrency scene are generally bad news to the economy, and to a greater extent, to the people who directly depend on crypto to earn a living. Fortunately, the industry has managed to bounce back up every time. So, even though we are currently dealing with another dip, there are high hopes for recovery based on what analysts are saying. It, however, remains to be seen how healthy the market will be after recovering and the aftermath of it all.

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