Bears tighten grip on cryptocurrency market after spell of volatility

Prices crashed, exchanges facing liquidity issues

Millions of investors who haven’t seen wide swings in the cryptocurrency market have tasted it during last week’s sharp fall in prices. Worse, now bears are trying to tighten their grip on the market.

Bitcoin price, which had fallen below $28,000 last Thursday, has inched up somewhat to around $30,000. However, the price is expected to be sideways, with a downward bias. 

The fall has been led by a crash in stablecoin prices. A leading stablecoin has been delisted from trading by many exchanges in India.

In early May, investors had deposited more than $14 billion of TerraUSD in Anchor (Luna), according to the platform’s website.

Stablecoins are called such because they are pegged to the value of underlying assets or currencies like the US dollar. 

TerraUSD was pegged to the US dollar with $1 as peg value. This peg gave comfort to investors that the coin is stable as dollars equivalent to coins issued were parked in assets by the token issuer.

However, last week some big transactions knocked the TerraUSD — the Terra Luna lost the $1-value. The instability prompted more investors to pull their TerraUSD from Anchor and sell the coin. As a result, the price of Luna fell to $0.0108 last Thursday. 

Indian cryptocurrency exchanges like CoinSwitch Kuber, WazirX, and others delisted this token. And investors were not able to transfer their holdings to other private wallets from the exchange’s custody because the Terra ecosystem has halted the blockchain. This development led to further fall in Luna’s price to $0.0002702. Just a week ago, the Luna was trading at $65.14.

Following the crash in stablecoins, bears tightened their grip over the cryptocurrency market. MicroStrategy, a Nasdaq-listed embedded analytics platform, which has been increasing its Bitcoin holdings with high-leveraged positions, has seen losses. Bears found reason to hammer Bitcoins — a leading cryptocurrency with 45 per cent market share.

Nigam Arora, a US-based financial market and algorithm expert and author of the Arora Report, said, “The Bitcoin is highly correlated to long-duration speculative tech stocks on the Nasdaq. Typically, many investors own both. Long-duration tech stocks have been crushed due to the US Federal Reserve (Fed) raising interest rates. In the short term, the Bitcoin will attempt to rally because it is oversold. However, MicroStrategy’s huge hoard of Bitcoin (average cost $30,000) is a sitting duck because MicroStrategy will receive a margin call if Bitcoin falls below $21,000. The bears will try to drive Bitcoin below $21,000.”

Several stablecoins and memecoins are also under pressure and even Indian investors have put in huge money. Those who failed to book profit in stablecoins or have yet not transferred profit to their account are under stress.

Sidharth Sogani, managing director, CRABACO, a cryptocurrency exchanges and blockchain rating company, said, “Even though the Bitcoin is fundamentally a non-correlated asset, the market involves a lot of stablecoins and dollars in circulation. And hence, short-term price action is always negative. He sees prices remaining sideways in the next three to six months.”

The global financial markets are now entering into a recession-like phase, say experts, and the forward spread and yield curve indicate that. “The Fed has not yet started to make adjustments to the balance sheet,” added Sogani.

Exchanges in India are facing liquidity crunch with one of the leading exchanges halting rupee deposits by investors to their account, while another is facing issues (longer time) in crediting money back to investor accounts. 

Said a cryptocurrency trader, “Many payments in and out are not going through as well. Unified Payments Interface and banking support are weak. Exchanges are not responding to customer grievances on time. This is all leading to a very difficult time ahead.”

“The exchanges are running dry, liquidity providers have pulled out at many exchanges. The only liquidity seen is in USDT/INR (Tether), which may be due to the bots maintaining the order books. In the Indian cryptocurrency industry, the situation is already bad. We are already fighting against a 30 per cent flat tax, and we are slammed with 28 per cent goods and services tax and 1 per cent tax deducted at source. This is killing the industry in simple words,” said Sogani.

CoinDCX, one of the prominent Indian cryptocurrency exchanges, has said in an email sent to investors that they are facing issues in crediting money to investor accounts, which is taking 24-48 hours and they are upgrading their systems. 

WazirX, another prominent exchange, said in a tweet last Thursday that it has temporarily disabled deposits to the exchange through netbanking. (So investors are not able to buy fresh lots of cryptocurrency at a lower price on the exchange’s platform). The exchange is working on adding more rupee deposit options and also asked investors to use its peer-to-peer option.

Nischal Shetty, founder, WazirX, said, “We have recently seen hesitance from the banking industry to assist the cryptocurrency sector. We will need the support of banks to improve liquidity. At present, we are still in talks with payment providers to support deposits into cryptocurrency exchanges and hope to mitigate this challenge soon.”

In April, cryptocurrency trading volumes had fallen to a fifth of March-end volumes. However, in the last two days, there has been an increase in volumes, said a spokesperson for a leading exchange.