On Friday, billions of dollars in value evaporated in hours.
The cryptocurrency market completely crashed at 8:30 a.m. ET on Friday when the stock market opened. Bitcoin (BTC -4.77%) As of 3:15 p.m. ET, the value had fallen more than $4,000 to $66,440. Ethereum (Ethereum -8.78%) That's 9% off to $3,216 for the same period. dogecoin (Doge -12.38%) It plunged 14.2%.
The decline began early Friday morning but accelerated around noon ET. At this time, small declines turned into double-digit losses for many cryptocurrencies.
There wasn't any big news from the cryptocurrency world today, but this kind of volatility often occurs over the weekend and weekends. And for the first time in a while, I got it today.
Bad week for cryptocurrencies
There hasn't been much good news for cryptocurrencies this week. Higher-than-expected inflation reported earlier this week has caused interest rates to rise and tech and growth stocks to fall, all of which traditionally correlate with declines in cryptocurrency values. It just took the market a little time to process the news.
It also caused the U.S. Securities and Exchange Commission (SEC) to issue a Wells Notice. uniswap, which is a precursor to legal action against cryptocurrencies. While the market has been fighting to clarify what is legal and what is not, the SEC has chosen to take legal action against high-profile counterparties, including: XRP and coinbase. But it's not clear what the outcome of the recent battles will be, as the SEC has also lost most of those battles.
Due to the lack of regulatory clarity, it is not surprising that some investors choose to take profits during market peaks.
Liquidation causes crash on Friday
Once a crash begins, leverage in the crypto market may accelerate the crash. Not only are traders leveraging their positions, but liquidity is also likely to decline as the week ends, which may have worsened Friday's situation.
According to Coinglass.com, $668 million of long positions were liquidated in the past four hours alone. Liquidations are not uncommon, but they are typically limited to hundreds of millions of dollars per day, and do not reach that level in just a few hours.
A characteristic of this collapse is its breadth. Not only are Bitcoin, Ethereum, and Dogecoin falling, but smaller tokens are seeing even greater declines.
Volatility and the week ahead
The cryptocurrency market has always been volatile, but this is an unusually large drop. It's unclear what will stop it.
Over the past few months, the market has benefited from billions of dollars in inflows into Bitcoin ETFs, with speculators leading the way and leveraging moves to amplify the move. That's great on the way up, but if the trend reverses, it could be terrible for the value of the cryptocurrency.
I am cautious about short-term price fluctuations in cryptocurrencies, as I think investors will seek safer investments as interest rates rise and earnings season begins. But this weekend could mark the beginning of a particularly volatile period for the industry.
Travis Hoium has positions in Coinbase Global and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Ethereum, Uniswap Protocol Token, and XRP. The Motley Fool has a disclosure policy.
