Why Is Crypto Down?

Crypto took yet another downward turn in early March 2023 amid a succession of discouraging developments both within the crypto space and in the economy at large.

Within the span of a few days, Bitcoin and other digital assets absorbed a series of market shocks, including the announcement that key industry player Silvergate Bank would shut down amid financial difficulties.

Meanwhile, the regulatory outlook for cryptocurrency is becoming cloudier: The New York attorney general's office alleged in a lawsuit March 9, 2023 that it considers Ethereum — the second most valuable cryptocurrency — to be an unregistered security.

Higher interest rates could lead to lower investor interest in risky assets such as cryptocurrency.

The latest turbulence is another reminder of the rapid shifts that are possible in a new, untested asset class such as crypto.

Cryptocurrency values had been recovering in early 2023 from losses linked to the crash of crypto exchanges FTX and FTX.US. Because FTX had invested in so many crypto-related companies and cryptocurrencies, its collapse has far-reaching impacts in the sector.

» Learn more: What to do if your crypto exchange fails

In general, what causes crypto downturns?

Here are some of the general reasons behind big drops in prices:

• Low liquidity. If a cryptocurrency is trading at lower-than-usual volumes, weird things can happen, like a single large trade throwing off the market by swinging prices closer to the value of that transaction. Following an event like FTX's crash, for example, big investors or entities dumping large amounts of crypto could cause prices to drop quickly.

• Speculative trading dries up. High-risk trading with hopes of quick returns can end badly when momentum wanes.

• Regulatory changes: The SEC's crackdown on Kraken is a reminder that many questions about the legal status of cryptocurrency remain unresolved. One big question is which cryptocurrencies, if any, should be considered securities for the purposes of financial regulation. The way these questions shake out can have implications for market values.

• Loss of trust. Trust in a product is a price driver. If it evaporates, prices can, too. In addition, because crypto is a novel asset class based on relatively new technology, signs of trouble such as cyberattacks or product failures can adversely affect the broader sector. As FTX's bankruptcy shakes investors' trust in the crypto industry and exchanges, many might be less willing to put money in crypto.