Why is Crypto Crashing? Explaining the Death Spiral

This year has been a crazy ride for cryptocurrencies.

From its all-time highs in November 2022, Bitcoin (BTC -1.02%) has dropped 70% in less than eight months, and the world has been finding out why is crypto crashing. Over the same time frame, Ethereum (ETH -1.27%) suffered a 78% loss. At the same time, the stock market resembled a whirlwind, yet the S&P 500 (GSPC 0.45%) market index only saw a 22% decline in value. 

In June, the markets saw a severe shift. Since the summer’s bottom, both Bitcoin and the S&P 500 have experienced double-digit percentage gains, while Ethereum has surged more than 70%. Although that increase may seem significant, keep in mind that Ethereum began its recovery from extremely low prices. Overall, since their peaks in November of last year, both Ethereum and Bitcoin have decreased by more than 60%.

Cryptocurrency in use

The economy provided the majority of the market-moving fuel. Not just in America but throughout the world, inflation is rising. Supply networks and banking institutions were already under pressure from the coronavirus outbreak, and geopolitical unrest in Asia and Europe made matters worse. 

However, there have been some significant advancements in the cryptocurrency sector recently. When cryptocurrency investors look back on 2022 in the future, these events will likely seem significant.

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Why is Crypto Crashing Today?

Crypto Scams

The Federal Reserve’s aggressive macroeconomic policies have made things difficult for the cryptocurrency sector.

The Consumer Price Index, which will be issued on Thursday, is now being closely watched by the cryptocurrency market. The CPI is a reliable gauge of national inflation rates. The CPI data for last month was worse than anticipated. The outcome was tremendous carnage on the cryptocurrency market. 

In a similar vein, this month will also see the release of the Producer Price Index. Important Fed figures keep repeating how hawkish they are about inflation. The CME Fed Watch tool currently predicts a 75 basis point increase in interest rates. The market may price in a massive increase of 100 basis points if the published CPI and PPI are worse than anticipated. This situation caused a further sell-off in the cryptocurrency market last month.


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Signs of a Death Spiral

A death spiral describes a market collapse brought on by a series of unanticipated occurrences.

The phrase “death spiral” refers to a market’s imminent or complete collapse as a result of a string of unanticipated occurrences or poor investing choices. One way to think of a death spiral is as a kind of perfect storm of market falls. It may occur within a specific market, like the stock market, or it may occur across many financial markets.

When costs spiral out of control, such as when a business stops producing its items but fails to cut fixed costs, decisions can cascade into even worse judgments. This is known as a death spiral in accounting. a downward spiral When many convertible bonds are converted into common stock, a convertible happens, yet there is a significant price difference. As a result, the converted stock loses all of its value, and the company’s original owners are no longer in charge. 

Media outlets used it to describe a collapse in the cryptocurrency market in May 2022. One cryptocurrency, luna crypto crash, quickly lost virtually all of its value, and panic selling spread to other cryptocurrencies, whose prices also fell sharply in response, but not to the same extent as Terra’s. In March, Terra’s price reached as high as $119 before tumbling to approximately a cent ($0.00015) in mid-May.

The collapse of the subprime lending and mortgage-backed securities markets in 2008 sent other financial markets, particularly bonds and stocks, as well as the housing market, into a tailspin. However, after the collapse of subprime lending, which had caused a housing boom, the Federal Reserve coined the term “downward spiral” to characterize the decrease in home prices. The financial crisis of 2007–2008 was the name given to that situation.

different crypto coin

Future of NFTs

Non-fungible tokens, or NFTs, have existed since 2014, but it wasn’t until 2021 that this cutting-edge technology became widely accepted. 

NFTs, which stand for digital ownership of a variety of unreplicable intangible goods, has caught the interest of prominent people and large corporations like American Express and Gucci. According to data gathered by DappRadar, an app store for decentralized applications, total NFT sales reached $25 billion in 2021 as opposed to $94.9 million the previous year. 

However, the question of whether NFTs are merely a fad or a trend is still up for debate. For the first time in a year, NFT sales went under $1 billion in June. The opinions of experts are still divided; some call NFTs a “bubble,” while others argue that the smart contracts used in blockchain technology, which underlie them, are what actually provide genuine value. Artists and producers are asserting that this is the newest method of income in the meantime. 

According to Humphrey Yang, the personal financial specialist at HumphreyTalks, “I do think that they’re really hot right now, especially the previous four months.” 

“They’ll still be around in 10 or 20 years. I’m not sure how often we use them. Communities will continue to hold some importance for people, but NFTs’ more extensive uses will be more fascinating.

Recent evidence suggests that the market may finally be slowing down. At the beginning of the year, nearly a million accounts were actively buying or selling NFTs; however, as of recently, only roughly 491,000 accounts were doing so. Because of the dropping value of cryptocurrencies, and other macroeconomic factors, including inflation, rising interest rates, and Russia’s conflict in Ukraine, several experts predict that the NFT industry will continue to be negatively impacted.

types of crypto coins

The Future of Cryptocurrency

In reality, cryptocurrency is still a new and speculative investment with little historical data on which to base predictions.

We can guess what value bitcoin may have for investors in the coming months and years (and many will). No of what a particular expert believes or claims, nobody truly knows. For long-term wealth creation, it is crucial only to invest what you are willing to lose and to stay with more traditional investments. 

Keep your investments modest, and never prioritize cryptocurrencies over other financial objectives like retirement savings and debt repayment with high-interest rates.

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