The cryptocurrency market had a rude awakening on Saturday as major cryptocurrencies fell over 20% briefly. As of 1:20 p.m. ET, every cryptocurrency with a market cap over $10 billion is down over the last 24 hours, apart from so-called stablecoins that track the U.S. dollar and other fiat currencies.
Bitcoin (BTC 4.76%) was the most notable move, falling as much as 25% from trading at 7:00 p.m. ET on Friday night to a low of $42,749 near 11:00 p.m. ET on as much as $2 billion in volume per hour. The value of bitcoin has stabilized around $48,280 as I'm writing, but that's still down 12% over the last 24 hours.
Ethereum (ETH 1.89%) followed a similar trajectory. Hitting $3,575 late on Friday, Ethereum has now fallen 7.5% over the last 24 hours. Solana (SOL 4.79%) is down 7.1% over the same timeframe while Cardano (ADA 5.74%) dropped 11.6% lower.
What's going on?
There are a few potential reasons for the rapid move, but when prices move this quickly at off-hours, the biggest driver is most likely nothing more than panic. According to Justin d'Anethan of crypto exchange EQONEX, as reported by Reuters, large holders have been moving cryptocurrencies from wallets to exchanges where they can more easily be sold. If big holders are selling and retail investors are highly leveraged in their cryptocurrency holdings a collapse in values can happen quickly.
Adding to the uncertainty is planned testimony before the U.S. House Financial Services Committee by executives from eight major firms, including Coinbase Global (COIN 3.58%), on December 8. Congress is trying to determine how to regulate the crypto market and these executives are trying to guide that regulation without completely crushing their business models.
Broad selling of cryptocurrencies started about a month ago at the same time as growth stocks started to decline en masse. The potential for inflation, slowing job growth, and a flee to safety have all hurt both growth stocks and cryptocurrencies, which seem to be very correlated on the market. You can see below that the march lower has been steady and this chart doesn't even include the drop in the last few hours.
Volatility is normal in the cryptocurrency market but the last week has been extreme. Big investors appear to be cashing in gains from the last two years, and the increase in volatility appears concerning in relation to the short-term price action for cryptocurrencies.
At the same time, investment in crypto infrastructure companies and utilities has only increased over the last few months and years, so there are long-term positives for the industry. But it could take years for those businesses to mature.
I'm worried that new investors who haven't been through a market crash before have added too much leverage and aren't prepared for large drops in volatile assets like cryptocurrencies. That shock can cause panic and a downward spiral of selling. For at least a few hours early this weekend, that spiral took hold of the market. Given the recent trends, I worry that a long-term downward spiral might just be getting started.