Trader looking at crypto price charts
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Why Ethereum Is Crashing and What To Expect for the Crypto

Mohit Oberoi, CFA - Author
By

Jun. 14 2022, Published 5:25 a.m. ET

The market cap of Ethereum, the world’s second-largest cryptocurrency, has reduced by more than one-third over the last week and now stands at around $135 billion. Why is ETH crashing? Will it go back up in 2022?

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There's been a bloodbath in cryptocurrencies across the board, and their total market cap has fallen from $3 trillion in Nov. 2021 to below $1 trillion. To put that in perspective, crypto investors' loss of $2 trillion exceeds Italy’s GDP—and the country's economy stands in the world's top ten.

eth price is crashing
Source: TradingView
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Risk assets are falling, and so is crypto

For a long time, crypto bulls have tried to position digital assets as the "new gold," an alternate asset class, and a hedge against inflation. More recently, they've pointed out that central banks' massive money printing and record low interest rates made fiat currencies worthless.

However, time and again, cryptocurrency prices have been highly correlated with those of stocks, which are also risk assets. And if crypto bulls' thesis were true, the multidecade high inflation should have lifted cryptocurrencies.

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Why are cryptocurrencies falling?

The Fed is expected to raise rates by 50 to 75 basis points this week. Many brokerages believe that the central bank, in efforts to tame inflation, may even risk a recession.

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As the days of easy money are ending, risk assets have come under pressure. Penny stocks, loss-making tech stocks, and cryptocurrencies are plunging as investors sell off everything speculative.

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Janet Yellen’s warning on cryptos

In response to Fidelity allowing Bitcoin for 401(k) plans, U.S. Treasury secretary Janet Yellen said that she won’t recommend the plans to most people and called them a “very risky investment.” Globally, regulators have been tightening the screws on cryptocurrencies.

Why is ETH crashing?

Ethereum developers have delayed a widely awaited network upgrade from a proof-of-work model to proof-of-stake. The shift is set to reduce the cryptocurrency's electricity consumption.

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Will Ethereum go back up?

Crypto experts have long been calling for a “crypto winter,” and the market has been volatile. After falling below $150 billion in Q1 2020, the crypto market grew 20-fold by Nov. 2021.

For Ethereum to go back up, crypto market sentiment needs to improve, and that looks unlikely in the near term—that is, until its upgrade is complete. For now, investors are set to avoid risky crypto bets.

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