Steemit Crypto Academy Contest / S1W4 – Reviewing the Instability of the Crypto Market by @pearlofwisdom

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Hello there welcome to my blog once again. This is another engagement challenge and this time I'm writing in the Steemit Crypto Academy on the topic "Reviewing the Instability of the Crypto Market".

Here we talk about the crypto markets by giving a review of the current state of the instability in the markets.

As you read my post I hope you enjoy it.

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What I Think Of the Drop of the Crypto Market in Recent times


The crypto market is like other financial markets in that it is volatile in nature. This makes it such that the price can go up and it can go down. This volatility is caused by so many factors. So it is expected that the price would increase and decrease with time.

In the early periods of 2021 the crypto market was in high ascendancy as the prices of different crypto coins and tokens were on an increase and the total market cap for the entire cryptocurrency market reached $3 Trillion, with the price of Bitcoin reaching an all-time high of just over $69K. However starting in November, the prices began to plummet, and this price drop was fueled by the decrease in the price of Bitcoin. This period can also be regarded as the bearish phase.

This decline (bearish phase) has continued this year and it has reached the month. Throughout this decline, the price has gone from $3 trillion to around $1.2 trillion about a 60% reduction. Although, this month's own was special as there was a major occurrence that took place in early May which caused the crypto market to further decline.

It is advisable that crypto enthusiasts and newcomers be aware of such occurrences in the crypto market so that they have an understanding of the crypto prices and how to perform optimally during this period.


Causes of the Decline


I said previously that the crypto market is volatile in nature which makes it increase and decrease with time, and the volatility is caused by some factors. Right now the crypto market is on a decline therefore there are factors that are making it decline.

Though I'm not too certain of the real factors why the prices are on a decrease, I will state some that I think is the cause.

One thing I can think of is the current demand and supply of the crypto markets. At this point, it is likely that the demand is far less than the supply which makes the prices decrease. Another thing I can feel is the investor's sentiments. The crypto market is made of investors (both short-term and long-term) who access the current situation of the market and follow the current trend. Recently, the trend has been down and so investors tend to follow this pattern

Another thing to think about in the news. So many things have been said about the cryptocurrency market in the news. Because the news needs to constantly create content for the crypto market and they can give out information that can either be favorable or not favorable to the crypto market. For instance, the news of the war between Russia and Ukraine, the rate of inflation, the Federal Reserve's increase in interest rate, and the meltdown of the Terra ecosystem have negatively impacted the crypto market.

Talking about the Terra ecosystem, there was an attack on the stable coin–UST which lead to an eventual dump of the stable coin in the market. Due to the mechanism (algorithmic) which the Terra ecosystem follows the dumb affected the entire Terra ecosystem badly and resulted in a shocking meltdown. This led to a lot of loss for investors in the Terra ecosystem and as such led the crypto market to panic and start selling off their assets thus leading to further decline in the cryptocurrency market. This also led the Terra ecosystem to come to an indefinite halt.


How long the decline will continue


I can't really tell how long the decline would continue but I can say that this decline would end very soon say in three months' time. My reason is that as I have said the crypto market is volatile, which makes it go up and down due to certain factors.

Early last year the market was up or increasing before it started decreasing late last year up until this time. This means that soon enough the market should be able to bounce back and continue to move up.

Also since the news of the Terra meltdown, a lot of cleansing and learning has taken place, so now the crypto market would seclude that event as a stand-alone and not something related to the entire crypto market so members of the crypto market would start having a positive outlook on the crypto market and this, in turn, would help to increase the price.

Another thing to consider is the influence of Bitcoin. By the time the price of Bitcoin starts increasing, it would give a positive signal to the entire crypto market which would in turn make the price of other crypto assets increase.

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Why the Drop in Price of a Few Coins Doesn't Decrease Trading Volume


The trading volume shows the amount that is flowing in or out of a cryptocurrency asset. If it declines then a lot of investors have removed their money from the asset and if it remains the same or increases, it means a lot of investors are either holding or putting in more money.

This explains that even as the price of the asset is falling, there are longer-term investors who are just about happy to hold in the midst of the decline and are therefore not willing to sell.

It could also mean that some short-term investors have seen it as an opportunity to buy the asset at a lower price so as to sell at a later time which can be profitable for them.

In technical terms, this can be seen as a bullish signal whereby the price is falling but the volume is not (or a trend reversal/divergence signal).


How They Will Deal with the Market Instability


It is a common theme to know that the crypto market is not stable because it is highly volatile. This should be the first information every crypto market participant should have knowledge of. This would help them greatly when approaching the crypto markets.

So for them to deal with the market instability they have to approach the market in a technical or fundamental way, depending on their preference. The technical way involves using technical charts and tools to make analyses and decisions which would be helpful to them. While the fundamental way involves getting different elements of a crypto asset which helps you make decisions on investing in the long run or HODLing as the case may be.

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Relationship Between the Current Instability and Terra Ecosystem and LUNA Crypto Downfall


The Terra Ecosystem played a major role in the instability of the crypto markets in recent times. An attack was made on the Terra Ecosystem which saw the value of its stable coin UST reduce from the pegged price of $1 to $0.98. Normally, a stable coin is supposed to help prevent users with crypto assets from experiencing volatility and instability in the crypto market.

The UST coin has been pegged to the US dollar at a ratio of 1 UST to $1. This peg is underpinned by an algorithmic mechanism where there is a mint and burn process that allows users to mint UST and burn $1 worth of its volatile currency LUNA at request time.

So as the attack happened, it made users sell the UST even more and opt for other stable coins. This made the price of UST drop suddenly and also affected the mint and burn process as it was required to maintain the price of UST to the peg of $1.


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UST price after the massive dump | Source

So as the price of UST reduced, it led to the dumping of UST for other more stable coins, which further reduced the price of UST. Because there is a mint and burn process, as the dumping occurred there was a massive minting of LUNA tokens concurrently which now made the supply of LUNA coins to be very high, and made holders of the LUNA tokens sell. All these led to the rapid decrease in the LUNA currency.

As this event occurred, the Terra Foundation sold 42.5K BTC which was to try to defend the situation surrounding the UST peg. The news was made based on this move and it was seen that the Terra foundation was trying to leave its BTC holdings. This was further interpreted as a dump of Bitcoin, so investors who panicked started dumping their Bitcoin.

So as users in the Terra ecosystem were selling off their assets due to the increase in the supply and the sentimental traders were selling off the Bitcoins due to the panic caused by the news of the Terra foundation selling off their BTC holdings, other cryptocurrencies participants began to sell of their crypto assets.


If I Think the Price would bounce back and How?


In my humble opinion, I don't think the price would bounce back. First, because investors have lost a lot of money in this crypto project, this would have a psychological effect on investors as they would ordinarily lack confidence and lose trust in the project. In addition, if they can't change their current algorithmic mechanism of maintaining the stable coin and LUNA, it would be difficult for them to get investors backing.


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LUNA's Valuation | Source

Another thing is the issue of the current supply of the LUNA coin. It is so much that it would be increasingly difficult for the price to reach a value of $1. Currently, the supply is 6 trillion LUNA and for it to reach $1 the market capitalization of the LUNA token has to reach $6 trillion which is not feasible as this would mean that the Terra ecosystem would be more valuable than the entire crypto market which stands currently at just above $1.2 T.

Another alternative is to burn these tokens but this is another issue entirely.

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Steem Causing Me Stress During this Market Down Turn


Steem did not cause me stress as some other people I suppose. I'm a relatively new member of Steemit and I haven't really withdrawn my rewards from the Steemit platform as I'm powering up all my tokens. However, I came to realize that as the price of STEEM was reduced it affected the amount that users were curated with. This meant that the amount of post-payout that a user would get is lower than usual. This is my first time having such an experience.

I believe that this is a normal occurrence that took place because of the current instability that rocked the cryptocurrency market. With time as the market heals and the prices of other assets begin to pick up, the price of the STEEM token would also increase.


Me Being Confident in The Project


I'm confident in the Steemit project because the fundamentals of the project are good. It is a crypto project where users publish posts and earn rewards based on their posts. So as the price is dropping, there is a culture where users are to power up at least 50% of their earnings. This gives a positive outlook as the volume of STEEM is increasing because users are earning rewards and holding them by powering up. This way the price of STEEM would improve positively and who knows it can happen in the nearest future.

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You go girl @pearlofwisdom with you being confident in steem price boom in future, definitely steemit is a unique project, atleast we invest our brain in crypto and not money(we're not panicking lol)

Excelente explicación, la desconfianza atráe más desconfianza y es por esto que el mercado de criptomonedas disminuye aun mas, gracias por ayudarnos a entender este tema, te felicito, te deseo mucha suerte en el concurso 🤗

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