In May 2022, the stablecoin TerraUSD plummeted as traders engaged in an old-fashioned “bank run,” as they feared that it didn’t have the crypto assets to back its peg to the dollar. This news spilled over into other crypto markets, as traders worried that selling would beget more selling. So, these moves have been further significant blows to the burgeoning market, which had been enjoying significant capital inflows. Cryptocurrency is volatile by nature. Because crypto generates no cash flow, traders have to rely on changes in sentiment to drive the price. That means the market can swing between rabid optimism, as it did in early 2021, to pessimistic despair, as it did a few months later. The furor around the Coinbase IPO in 2021 helped drive positive sentiment to crypto, while the reduction in monetary stimulus drove pessimism at the end of 2021 and start of 2022. So when you have an asset that’s driven by sentiment, the emotions of traders propel the market. That’s true in the case of stocks, too, but they also may have a real stream of growing cash flows from their issuing company to accelerate them higher.
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