Bitcoin dropped below the psychologically important support level of $40,000 Friday, slumping over 10 percent in what was a massive sell-off in the entire cryptocurrency market. The slump continues to deepen as the world’s biggest cryptocurrency saw a decline in value by $5,000, a decrease of 8 percent over the past day.

Bitcoin is currently trading at $35,700, even when trading activity has picked up significantly, indicating a mass sell-off in progress. The coin is down over 40 percent from its all-time high of $69,000.

Outside of stablecoins, all of the world’s biggest 100 cryptocurrency tokens are currently trading in the red, with some coins down as much as 30 percent. Ether, the second-biggest cryptocurrency, slipped below its $3,000 support level. It is down 15 percent in the last 24 hours, dropping to $2,400.

Binance Coin, the fourth largest coin, has slumped over 17 percent and Cardano is down over 15 percent. Dogecoin has declined over 13 percent while both Solana and Polkadot have crashed 20 percent.

Meanwhile, as per data from coinmarketcap.com, the cryptocurrency market cap has declined by over 12 percent in the last 24 hours.

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What triggered the crash?

The main cause behind the latest rout is believed to be the proposal by the Russian Central Bank to ban cryptocurrency. The Central Bank of Russia yesterday stated it was proposing to the government that all use and mining of cryptocurrencies on Russian territory be banned.

This move would be taken due to the risks that cryptocurrency poses to financial stability, the sovereignty of monetary policy as well as the financial safety of its citizens, said the bank. The legal status of cryptocurrency has shifted quite a bit in the country in the past.

While Russia has been resistant to cryptocurrencies for years, citing threats of terror financing, it had still granted cryptocurrencies legal status in 2020. However, the use of the tokens as payments was banned.

What other factors affect the downside movement?

Even before the news of the Russian central bank demanding an immediate ban on cryptocurrency, a large portion of the market was already trading in the red.

Federal Reserve's hawkish stance: Wider macro-economic conditions, Federal Reserve's hawkish stance and decision to hike interest rates as soon as March, and less than expected earnings from technology companies all have had an impact.

The US Federal Reserve, arguably the most important central bank in the world, is expected to hike interest rates multiple times through the year to curtail the rising inflation in the country. The hawkish stance of the US Fed has made investors more cautious of investments, while weak macroeconomic indicators due to the resurgent COVID-19 wave have made bond yields significantly more attractive to investors.

Wall Street sell-off: As a result, riskier investments like cryptocurrency and equities in tech and growth stocks have seen a sharp sell-off. Earnings for tech stocks have been lower as well which has further exacerbated the wider negative sentiment in the market.

Growing correlation with traditional markets: Plus, market experts believe Bitcoin's correlation with Wall Street is growing due to massive institutional interest in the crypto markets. So when Wall Street witnesses a sell-off, it spills over into the crypto market.

Leveraged long positions: As per a report on CoinDesk, another reason for the sell-off is a leveraged long position. Investors who held long positions on crypto expecting the price to rise are selling their positions. According to coinglass.com, over long positions worth over $1 billion were liquidated in the last 24 hours. Bitcoin led the liquidations at $250 million, followed by Ether at $160 million.

Liquidations in the market happens when investors don't have the money to fund the margin call.

Impact and outlook

Despite the negative signalling from the Russian government, awarding of the legal status had meant that Russia had quickly become one of the biggest crypto adopters in the world. China’s ban on cryptocurrency had resulted in a similar rout before the crypto market pared back the losses and gained. But, Russia had become the third-largest Bitcoin mining hub in the world.

Now, news of an impending ban has soured market sentiment when global factors have already resulted in significant downward pressure on the crypto market. And when panic selling combines with leverage, the result is often a disaster for a market that trades round the clock.

Though this is not the first major slump that crypto has seen in the past two years, investors say that even a 30 percent slump is only a blimp in the wider bull rally that crypto seems to be on.

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(Edited by : Yashi Gupta)