Invest: Why El Salvador caused the cryptocurrency crash?

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This week is a very bad week for cryptocurrency investors. A rocky week, one might say. Bitcoin (BTC), which traded above $52,000 on Monday but $45,000 on Friday, as well as ethereum and Cardano. However, from the peak to trough, the latter 2 didn’t lose nearly as much as BTC, which suffered offshore outflows upwards of $3 billion during Tuesday’s selloff.

And one piece of news that may seem to be the root cause for the crash – the first sovereign country on earth adopted BTC as legal tender.

Despite the sharp price fall, most of crypto’s true believers are still optimistic. Michael Sonnenshein, CEO of Grayscale Investment, the world’s largest cryptocurrency fund manager by assets, believes that other countries are likely to join El Salvador in the race to make crypto legal tender.

Looking back for a few weeks, Jeff Sekinger, a financial guru and founder of the Miami-based crypto hedge fund Orca Capital, correctly predicted this crash on Aug 31. 

“When the perpetual funding, opening interest and price action are all moving up but volume is slowing, it’s been a telltale sign for the past 3 major crashes… And now it is about to happen again.”

This time, the downturn came from the combination of high leverage in the markets on top of cryptocurrency traders “buying the rumor and selling the news,” according to Sekinger. That was proof that the market is still relatively small – and still heavily manipulated by a few big players.

Non-fungible tokens, or NFTs, is another reason for the crash. “Retail investors see all these crazy stories about the ridiculous amount of money being made on NFTs and that sparks their interest.” This probably caused people’s interests to shift from BTC to NFTs.

Unlike Sekinger, another financial guru, John Paulson, is bearish on cryptocurrency as a whole. “I wouldn’t recommend anyone invest in cryptocurrencies. I would describe them as a limited supply of nothing. So to the extent there’s more demand than the limited supply, the price would go up. But to the extent the demand falls, then the price would go down. There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.”

One thing to notice is that Paulson also said that cryptocurrencies could eventually be worthless. “Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies.”

That said, El Salvador’s BTC legal tender adoption is NOT the root cause for this crash. Instead, the country is just unlucky enough to have announced their big news on a very bad day. Though they might as well have chosen the best day to “buy the dip.” 

The catch, however, is you never really know if it truly is a dip – or a trough, or a Marianas Trench-size pit of hell – until enough time passes for hindsight to kick in.


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