Although Bitcoin appears unaffected, more and more cryptocurrency initiatives are failing. The Terra (LUNA) system collapsed, Celsius collapsed, and now Three Arrows Capital is having financial issues. The state of the Web3 globe and the cryptocurrency markets at this time suggests that nothing will improve. In this situation, one may ask what the true cause of all these issues is that this industry is experiencing despite having every opportunity to prosper. A recent investigation indicates that a liquidity issue, rather than a technological issue, is the primary cause of the failure of crypto enterprises.
Market that has been damaged by false promises and con artists
There are now about 20,000 cryptocurrency projects, and the competition is fierce! Many businesses have made implausible promises in an effort to win customers and drive out rivals in order to dominate the market. They also promised updates, consensus modifications, and extremely high returns. Ultimately, a number of ventures proved to be apparent frauds that stole money from investors.
The US Federal Reserve (Fed) intervened in response to the situation’s development and declared quantitative tightening (QT) by the end of 2021. We must first comprehend the idea of quantitative easing in order to comprehend QT. The latter describes how the Fed prints money to create new currency. The Fed’s balance sheet grows when printed money is credited to the accounts of sellers of Treasury bills and mortgage-backed securities (MBS).
The QT calls for the Fed to scale back or cease this activity while carrying on with its open market asset sales. Quantitative tightening has caused significant liquidity pressure on hazardous markets, which has had an impact on the bitcoin industry. Cryptocurrency initiatives that made unreasonable return promises eventually collapsed.
While this was happening, the Fed’s balance sheet, which increased by almost $8.5 trillion in 2008, decreased by only $23 billion. Additionally, the Fed might keep draining market liquidity to battle inflation.
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