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Why Altcoins Crashed on Friday

The Motley Fool
The Motley Fool
 2022-01-21

What happened

The value of cryptocurrencies cratered on Friday as an industrywide sell-off took hold. The biggest cryptocurrencies were down today but smaller cryptocurrencies, known as altcoins , were down even more. In some cases, values were down 20% in just the last 24 hours.

As of 11 a.m. ET, Polygon (CRYPTO: MATIC) had dropped as much as 17.4% in the last 24 hours, Avalanche (CRYPTO: AVAX) was down 17.9%, Cosmos (CRYPTO: ATOM) had fallen 14.5%, and Terra (CRYPTO: LUNA) had plunged 14.9%. They are down 13.3%, 14.6%, 9.4%, and 11.4%, respectively, as of 1:30 p.m. ET.

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Image source: Getty Images.

So what

There have been macro pressures on the crypto industry all week. Interest rates were up early in the week as the Federal Reserve prepares to increase interest rates and reduce bond purchases earlier than investors were previously expecting.

In Russia, there were multiple proposals to outright ban cryptocurrencies and crypto mining , which could follow China's ban of cryptocurrencies. As with any currency or ecosystem, more users is good for valuations so Russia banning crypto would be an incremental negative for valuations.

One of the reasons cryptocurrencies can drop quickly is because of leverage traders put on positions, which can be liquidated by exchanges if valuations drop. According to coinglass.com, there have been $875 million in liquidations over the last 24 hours, a level we haven't seen since the crash on Dec. 3, 2021.

Cryptocurrencies also tend to be correlated with -- and more volatile than -- tech and growth stocks. With the market trading lower today and many growth stocks selling off, it's not surprising to see crypto down big today.

Now what

Volatility is normal in cryptocurrencies but today's drop is more dramatic than normal. This seems to be a macro "risk-off" move by the market overall and it is hitting crypto hard.

What's worth considering with altcoins specifically is that long-term value will be built by the ecosystem they're creating. Decentralized finance, non-fungible tokens (NFTs), games, and other products and services are ultimately what will attract users and we're still early in that evolution.

It's unclear when the current selling will end but it's been a few months since investors began selling riskier assets like cryptocurrencies as interest rates started to rise. That trend may still have some legs, but over time the market will find a bottom.

I'm still very bullish on this industry long-term but will be focusing on where utility is being built and where users are headed. That's ultimately what's going to drive value to cryptocurrencies more than trading everyday.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns and recommends Terra. The Motley Fool has a disclosure policy .

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