What happened
Altcoins had a rough day starting late on Monday night and continuing into Tuesday. Major cryptocurrencies were the leaders lower, but smaller coins magnified the losses of larger market cap coins in trading on Tuesday.
XRP (XRP +0.09%) has fallen 8.3% in the last 24 hours, Cardano (ADA 2.17%) has fallen 7.7%, Chainlink (LINK +0.08%) fell 12.4%, and Crypto.com Coin (CRO 1.91%) is down 10.3%, just to name a few. There are a few things likely impacting trading today.
Image source: Getty Images.
So what
The first notable item is that all cryptocurrencies are down, which can cause a cascading drop across the market. Coinglass.com reports that $521 million of long crypto trades has been liquidated from 164,115 accounts in the last 24 hours. The selling began on Monday when $418.5 million in long positions was liquidated, so liquidating seems to be picking up the pace on Tuesday.
This may not seem important, but when traders borrow money on margin to take a long position (betting an asset will go up in value) or short position (betting an asset will go down in value), they can be forced to sell immediately if they lose too much money. Brokers and exchanges require a certain percentage of an account to be held in cash or the value of a security, so these positions can be liquidated if too much leverage is in a portfolio.
The last time cryptocurrencies dropped this quickly was December 2 and 3 when over $2 billion of crypto was liquidated on a variety of exchanges. In the days that followed that crash cryptocurrencies stabilized, but the selling today has pushed some to prices near lows of a month ago.
Now what
Given the lack of real news to drive the cryptocurrency market, I would chalk up today's move to normal volatility. This week there is generally lower trading volume in the market and that can lead to strange moves. In crypto, there's a lot of leverage by many traders and that can lead to the kind of liquidations I highlighted above, sparking a rapid sell-off.
As the market returns to more normal trading early in 2022, I think it's important to see more people use crypto as a utility product, whether that's with NFTs or decentralized finance products.
I think the cryptocurrencies that can build out the best ecosystems will ultimately be the winners for investors. XRP, Cardano, Chainlink, and Crypto.com are all building their own takes on a cryptocurrency ecosystem and that's the reason investors have been bullish on them. Long term, it's these ecosystems, not the volatility of a few days of trading, that investors should be focused on, which is why today's big move should be ignored long term.
