Following a difficult start to 2022, cryptocurrencies have entered a full meltdown. After the Federal Reserve signalling the end of its quantitative easing policy and amid political turmoil in Kazakhstan, which heavily disrupted cryptocurrency mining operations, prices of top cryptocurrencies are down anywhere between 50 percent and 80 percent over the past three months.

The drop came as a rude shock to cryptocurrency investors, many of whom were emboldened after Goldman Sachs’ bold call that Bitcoin would touch $100,000 in 2022.

Among key cryptocurrencies, Bitcoin has fallen to $33,500, down more than 50 percent from its November 2021 peak of about $69,000. The free fall in Bitcoin prices has accompanied high-volume liquidations throughout the crypto market.

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On Friday, 185,480 traders liquidated crypto assets to the tune of $715 million, with $173 million worth of positions on the crypto exchange Binance alone. Ethereum, which touched an all-time high of $4,812 in November has fallen to $2,250.

"Bitcoin's continued selloff is driving speculators out the market. However, with leverage quick to build up around this asset, the market could be setting itself up for a short squeeze and relief rally," said Ben Caselin, head of research and strategy at crypto exchange AAX, in a conversation with Cryptonews.com.

Overall, the cryptocurrency market call has fallen to $1.5 trillion from about $3 trillion in November, according to CoinMarketCap.

Key reasons behind the crypto bloodbath

Multiple factors could have a hand to play in the crypto meltdown:

1. Imminent Russian blanket ban:

While the exact reason is difficult to ascertain, a key cause is believed to be the release of the paper "Cryptocurrencies: Trends, Risks, and Regulation" by the Bank of Russia. The central bank, which has advocated a blanket ban on crypto mining and trading for a while now, said a ban on mining would be justified as it is a "wasteful use of resources."

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The central bank said crypto transactions by Russian citizens, amounting to $5 billion, posed a risk to the financial system. "The spread of cryptocurrencies could make people withdraw their savings from the Russian financial sector and, subsequently, decrease its capability to finance the real sector and potential economic growth, reducing the number of jobs and potential for household income increase," the paper reads.

Russia, the third-largest Bitcoin miner globally, is home to 11 percent of Bitcoin's average monthly hash rate (a measure of computing power dedicated to mining operations). Russia is only USA and Kazakhstan, with 35 percent and 18 percent of the global mining hash rate, respectively.

2. Fed Policy

The slump in Bitcoin prices also coincided with the Federal Reserve's decision to hike interest rates in the US, which is currently facing its highest inflation levels in decades. The rise in inflation has sparked a rise in the 10-year Treasury yields, causing investors to opt-out of their positions in riskier asset classes like cryptocurrencies.

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The Fed’s stance has resulted in a crash in not just the crypto market but also equities. Experts said cryptocurrency prices may continue to remain volatile till there is clarity on how regulation will shape up for the virtual currencies.

Ben Caselin of AAX said the massive selloff is "not too concerning" as it is weeding out non-serious investors and making way for new entrants in the market.

(Edited by : Jomy Jos Pullokaran)