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It has been a rough start to the year for cryptocurrencies. The total market capitalization has fallen by more than $300 million since Jan. 1, according to data from CoinMarketCap. The nosedive has been driven primarily by record inflation and the war in Ukraine. Some of the most popular assets like Bitcoin and Ethereum have lost 9% and 20% of their value, respectively, since the beginning of the year as well, leading many investors to worry a crypto market crash may be inevitable.
While the crypto market is known for being extremely volatile, this isn’t the first time it has taken a big nosedive. The market fell by more than 52% between May and the end of July 2021. It has also fallen by another 38% since November 2021. Outside of the volatility, many investors seem to be losing their patience with cryptocurrencies and are waiting for the market to become more stable.
For an industry that enjoyed unprecedented growth during the pandemic, the recent downturn is a sign the light may be dimming on the overall market. Here are two other signs a crypto market crash is on the horizon.
Consumer sentiment is falling
The recent crypto volatility has shaken loose many investors from the market. According to data from Cryptocurrency Sentiment, a survey that tracks consumer sentiment, strategic confidence in cryptocurrencies is weak.
Even though prices have recovered over the last seven days, Manfred Hübner, the managing director of Sentix, a behavioral analysis firm, says the lack of strategic confidence is bad news for the market because “there is no sustainable, medium-term motivated investment buying.”
Hübner added there is evidence that interest in cryptocurrencies is also rising, which could be driven by increased adoption of the technology in places like Africa. While this could lead to a long-term recovery for assets like Bitcoin, Hübner says the market is still susceptible to short-term setbacks.
Digital asset flows are negative over the last month
Another reason why a crypto market crash may be on the horizon is that North American investors are pulling their money out of the market at an alarming pace. There was a $47 million outflow from the market last week, according to data from CoinShares, with more than 98% of the liquidations coming from the North American market.
Investors are also leaving some of the most popular assets, like Bitcoin, behind. Over the last two weeks, more than $101 million has been liquidated from Bitcoin. The case is even worse for Ethereum, which has seen outflows totaling more than $151 million so far this year. That represents more than 1.2% of assets under Ethereum’s management.
As with any investment, cryptocurrencies carry a lot of risk that investors need to be aware of before spending their first dollar.
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Robert Davis has no position in any of the cryptocurrencies mentioned.
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