Will the crypto market continue to sell off?


Cryptocurrencies rose significantly and managed to achieve record values since the beginning of the pandemic, which made them one of the best-performing assets on the market. But subsequent sales have again shaken investors' confidence in them and raised questions about their ability to be used as a means of storing value.

The poor performance since the beginning of May has caused mixed sentiment both among supporters of digital assets, who believe they have the potential to change the entire financial system, and their critics.

It is important for traders to understand the main drivers of this market in order to take advantage of future price changes.

What increased the cryptocurrencies prices?

The first upward push was given in mid-March 2020, when leading central banks, including the Fed, undertook a series of stimulus programs to help their economies during the emerging pandemic.

The quantitative easings were positively accepted by investors, which has reflected in the stock markets. Central banks' expansionary policies have raised concerns about rising inflation and its impact on the economy and asset prices.

These fears led many market participants to direct part of their capital to crypto markets, which further supported their price.

The good performance of digital assets during the uncertainty surprised Wall Street and refuted one of the main criticisms, especially directed at bitcoin, that they did not undergo a period of crisis and uncertainty. This was the moment when the reliability of digital assets and their ability to store value began to be increasingly accepted, although many continued to describe them as speculative and highly overvalued.

A number of companies, including Tesla, which invested $1.5 billion in bitcoin, undertook purchases of digital currencies and began to accept them as a means of payment for their goods and services.

These actions of large companies and institutional investors continued to raise the prices of cryptocurrencies, which peaked in mid-April 2021.

What caused the sell-off?

Cryptocurrencies continue to be new and unproven assets that form an entirely new market. This significantly increases their volatility, which is due to several main reasons:

  • This asset class is not yet well known to the general public, and many people who have heard of digital assets do not know exactly what they are.
  • As the market is emerging, volumes are still lower, as is the number of market participants, which makes the market less liquid.
  • One of the main characteristics of cryptocurrencies is that they are not regulated by any institution, which according to many investors is a plus for their development. This is also the reason why any regulatory or restrictive actions in this market are perceived negatively.
  • This market is too small for large institutional investors at the moment. For this reason, purchases or sales of larger volumes have a more serious impact on their price.
  • News has a greater impact on price movements, as digital assets have not yet established themselves on the market and the actions of regulators can significantly limit their use.

The news were the reason for the rise in crypto markets this year, but they were also the catalyst for the sales that began in mid-May this year. On May 13, Elon Musk, Tesla's chief executive, announced that the company is suspending bitcoin payments for its products.

Investors reacted negatively to the news, which caused sales in the digital currency, as the mood shifted to the entire crypto market.

A new dose of negative news about digital assets followed, but this time they came from China. The second-largest economy had already restricted much of cryptocurrency trading and operations, but new restrictive measures were taken to completely stop trading and transactions in this type of assets.

This decision was announced just days after Elon Musk's statement and was the main reason for the subsequent collapse of the crypto market, as the ban on the use of bitcoin in such a large economy significantly limits its use.

Quite logically, the question arose whether other leading economies would take the same action, which caused panic among investors, who hurried to collect the realized profits, and others to limit the losses.

The news caused a 46% drop in bitcoin, 53% in ethereum, and over 60% in litecoin. Other digital currencies made similar losses, leading to one of the weakest performances for cryptocurrency assets to date.

What will be the future of crypto markets?

Recent events have confirmed that cryptocurrencies continue to be highly volatile and high-risk instruments, but data show that their use and acceptance by market participants have continued to increase over the last year.

At the moment, this trend is more likely to continue in the future, which will continue to expand the crypto market. Investors must monitor the actions of regulators in the United States and Europe, as they will be key to the future development and use of this asset class.

Despite the registered sales, bitcoin is 340% more expensive on an annual basis, ethereum by 1300%, and litecoin- 370%. These percentages are a clear indicator of the performance of digital assets, despite criticism.

This is actually the reason why many investors saw opportunities for long-term purchases in this situation, while others were panicked and sold their cryptocurrencies.

Trade cryptocurrencies

BenchMark offers cryptocurrencies for online trading. The instruments are offered as CFDs on the MetaTrader platform with a narrow buy/sell spread, without commissions and real-time quotes.

Trading cryptocurrencies makes it possible to achieve a result both when the price rises (through purchases) and when it becomes cheaper (through short sales) and because they are traded on a margin, deals can be concluded without the need to pay the total value of the cryptocurrencies.

Commissions NO
Spread from $0.005
Min. trading volume 0.01 lot
Margin requirement from 10%
Automatic execution YES
Hedging without margin YES
Long/short positions YES
Stop/Limit orders restrictions NO
Expert Advisors YES, without restrictions
Real-time quotes YES, completely free

The information provided is not and should not be construed as a recommendation, trade advice, investment research or investment decision consultation, recommendation to follow a particular investment strategy, or be taken as a guarantee for future performance. The content is not consistent with the risk profile, financial capabilities, experience, and knowledge of a particular investor. BenchMark uses public sources of information and is not responsible for the accuracy and completeness of the information, as well as for the period of its relevance after publication. Trading in financial instruments carries risk and can lead to both profits and partial or exceeding losses from the initial investment. For this reason, the client should not invest funds that he cannot afford to lose. This publication has not been prepared in accordance with regulatory requirements aimed at promoting the objectivity and independence of investment research and investment recommendations, is not subject to a ban on transactions in regard to certain financial instruments and/or issuers before its distribution by the person or persons concerned for the investment firm and as such should be perceived as a marketing message.