Why Cryptos Whipsawed In 2021?

Perhaps it was in 2021 and 2021 alone that the world sat up and took notice of the developments in crypto world to such a great extent.

At the end of 2020, cryptocurrency market capitalization was just $759 billion. By the end of January 2021, the market cap touched the psychological $1 trillion mark. Within a month, crypto market cap increased to $1.38 trillion and $1.84 billion was achieved by the end of March, 2021. The $2 trillion peak was scaled on 10th April, 2021 and markets closed April at $2.13 trillion.

When crypto markets scaled the $2.53 trillion level on May 12, there was all-round optimism and little inkling of how long it would take to breach that level again. Emission-related tweet storms and the force of regulatory crackdown on mining in certain countries caused the market cap to slump to $1.6 trillion at the end of May 2021. By the end of June, crypto market cap had fallen further to $1.42 trillion.

On July 20, there was global sell-off across world markets and the contagion spread to digital assets as well, causing the aggregate cryptocurrency market cap to slump to as low as $1.2 trillion. Soon, bullish momentum returned taking the market cap up to $1.63 trillion by the end of July.

The $2 trillion level was breached on 20 August and the closing market cap for August was $2.09 trillion. Crypto prices whipsawed in September as a flash crash followed after the frenzy that surrounded El Salvador’s according of legal tender status to Bitcoin. Bitcoin’s tryst with legal tender status in El Salvador was a bumpy beginning marked by technical glitches and protests that triggered an unprecedented volatility that shook the entire crypto space. Sentiment was dampened and the market capitalization at the end of September was just $1.90 trillion.

ETF frenzy pushed Bitcoin prices and resultantly crypto market capitalization to $2.59 trillion by the close of October. The metaverse frenzy that was triggered with Facebook’s rebranding to Meta also supported market sentiment in cryptosphere.

The Squid Game fiasco, an episode of money haste and money heist that happened in early November caused a flutter in the crypto market. The rug-pull event, a malicious manoeuvre in the cryptocurrency industry where crypto developers abandoned a project and ran away with investors’ funds, used privacy protocols like Tornado Cash to masquerade the heist transactions.

Crypto market capitalization touched a historic high of $2.97 trillion on 11th November amidst multi-year high inflation readings in the U.S. Bitcoin and Ethereum scaled fresh peaks as the role of an inflationary hedge pumped up crypto prices amidst the increasing hyper-inflation narrative. But the euphoria was short-lived and a flash crash eroded valuations and pushed crypto market cap to $2.76 trillion. Cryptos were reportedly hurt by fear of stock market meltdown and the haunting contagion from other asset classes, especially the property debt woes. Fresh concerns about the adequacy of reserves held by stablecoin players also seemingly played spoilsport to crush the party at the peak.

Cryptos closed trading for the month of November with a market capitalization of $2.63 trillion after a painful Black Friday meltdown. Another flash crash in early December saw valuations plunge again. Market cap dropped to $2.21 trillion and it has been a bumpy ride from then onwards.

The runaway inflation, the Fed dropping “transitory” from its inflation narrative, the withdrawal of pandemic-era monetary stimulus and the progression to a tight monetary policy regime dominated investor sentiment through much of December and kept crypto markets on tenterhooks.

At press time, on Wednesday, crypto market capitalization, is around $2.20 trillion, a gain of 183 percent over the levels recorded at the end of December 2020. Bitcoin is trading at $46,973, recording annual gains of 63 percent. Ethereum is trading at $3,722, having gained 404 percent on an yearly basis.

It is indeed the extraordinary volatility that beckoned many a new class of traders and investors to the cryptocurrency industry. Sans the volatility, the knowledge of the potential use cases of cryptos would have been confined to only a miniscule population of money managers.

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