Here's Why Bitcoin, Ethereum, Cardano Are Down by Over 15% Today

The total crypto market cap fell below $1 trillion today.

Crypto prices were in free fall today as the market reacted to successive shockwaves of bad news. The total crypto market cap slipped below the $1 trillion mark. Given that it topped $3 trillion last November, that's a significant pull back. Prices have recovered a little during the course of the day, but there's a good chance today's price drops will make it into the crypto history books.

At one point, Bitcoin (BTC) sank below $23,000, as its 18% drop in 24 hours took it to an 18-month low. Ethereum (ETH) and Solana (SOL) were hit even harder, with both registering drops of around 20%. Cardano (ADA) fared somewhat better, falling around 15%, according to CoinGecko data.

Why crypto prices fell so dramatically

The best way to understand today's crypto collapse is to think of a snowball gaining weight and momentum as it speeds downward. First of all, higher-than-expected inflation figures sent shockwaves through crypto and stock markets. Then, popular decentralized finance (DeFi) lending platform Celsius announced it would pause withdrawals on the platform. In addition, Binance temporarily halted certain Bitcoin withdrawals for technical reasons, and the head of the Bank of England reiterated his view that crypto investors could lose all their money.

Rising inflation figures

The consumer price index (CPI) for May was up 8.6% year on year -- higher than many economists had hoped. This squashed hopes that the Federal Reserve's economic tightening measures had already started to reduce inflation. Analysts had already expected another rate hike of 0.5% this month. Now there's talk of a 0.75% rise -- and the potential that the Fed's hawkish stance will last even longer.

The Fed's priority is to get spiraling prices under control and rate hikes are one of the various tools it has at its disposal. All of its measures essentially mean there's less money available -- contributing to a risk-averse environment. Added to which, it's becoming less and less likely that the Fed can curb inflation without sparking a recession. This uncertainty also has an impact on prices.

Celsius news fuels DeFi fears

Following the collapse of the Terra (LUNA) ecosystem, there's growing skepticism about crypto platforms that promise extraordinary rates of return. This has intensified today as another lending platform announced it was halting withdrawals due to "extreme market conditions."

Celsius said it would meet its obligations and honor its withdrawal obligations given time. However, there's speculation about the platform's ability to keep its promise. It doesn't help that competitor Nexo referred to "what appears to be the insolvency" in a Twitter thread offering to buy some of Celsius's assets. Not only is the Celsius news worrying, but it raises wider questions about the entire decentralized finance system.

What it means for investors

These kinds of losses are difficult for any investor to stomach, especially on the back of six months of dwindling value. If you bought crypto for the first time last year, it's very likely your portfolio is worth less than you invested -- in some cases dramatically so.

The big challenge is that prices could still fall further as we are now in a very different economic climate. In 2020 and 2021, there was a lot of pandemic-related economic stimulus money sloshing around. Now we're facing dramatic increases in living costs, fears of a recession, and a pull back from high-risk assets.

In the long term, Bitcoin may recover and go on to reach new highs. It has always done so before, though it has a relatively limited price history, and many analysts remain optimistic about its potential. However, there are still a lot of unknowns, and the whole industry has several significant hurdles to cross. For example, we know that increased regulation is in the cards, but we don't know how strict it will be.

The Celsius story also illustrates another potential issue. If prices stay low for a long period of time, there's a chance other crypto platforms will fail. Savings accounts are covered by FDIC insurance against bank failure. In contrast, there isn't a lot of protection for crypto investors if a crypto exchange or DeFi platform collapses.

Bottom line

Every time investors dare to hope the worst is over, crypto shows it can still fall further. Many investors may be tempted to cut their losses and sell now -- which is understandable. But if you sell today, you'll lock in your losses. You won't be able to benefit from any potential price increases.

It is almost impossible to know what might happen next. This is a high-risk asset class, and there are no guarantees. However, if you are able to keep a long-term perspective and only invest money you can afford to lose, you may be able to wait out this extremely difficult time.