As global central banks turn hawkish to ease inflationary pressures, a lack of liquidity has also created a funding crunch in the cryptocurrency space.
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A combination of reduced risk appetite and a stronger dollar has seen investors pull out of cryptocurrency funds, with outflows exceeding $100 million last week.
Separately, popular assets like Bitcoin, Ethereum, Tether, Dogecoin and Shiva have fallen by up to 33% over the past seven days.
The cryptocurrency market's total market capitalization has shrunk from $2.97 trillion in November 2021 to around $950 billion today, according to coinmarketcap.com.
Analysts believe that a period of macroeconomic stress and rising interest rates leading to safe haven securities like government bonds is contributing to the cryptocurrency selloff.
Minal Thukral, executive vice president of growth and strategy at CoinDCX, said that macroeconomic stress is correcting cryptocurrency prices. Funds are moving towards safe haven assets such as bonds. Cryptocurrencies are likely to remain in bearish territory in the short term.
It all started with the failure of Lunna-Terra, a black swan event that caused investors to sell off stablecoin TerraUSD, wiping out over $40 billion in market value.
Adding to the pressure, Celsius Network, one of the world's largest crypto lenders, suspended all transactions and withdrawals between accounts in an effort to stabilize liquidity.
In another development last week, a major cryptocurrency hedge fund is rumored to be facing $400 million in bankruptcy proceedings, with rumors suggesting the firm's investment in Luna has evaporated.
Meanwhile, US cryptocurrency exchanges such as Coinbase and Gemini have reportedly laid off between 10-18% of their employees due to the worsening economic situation and the cryptocurrency market crash.
Volatility in the cryptocurrency market is set to continue as the U.S. Federal Reserve continues to raise interest rates, while Indian investors have been reluctant for months.
WazirX Vice President Rajagopal Menon said inflation and monetary tightening will drive the cryptocurrency market. India's new tax regime is a big blow, he said. He added that inadequate banking channels are also reducing trading volumes. The cryptocurrency market is likely to remain in the weak zone in the short term.
US markets are closed today for the Juneteenth holiday. Later this week investors will be keeping a close eye on UK retail inflation for May, as well as US manufacturing and services PMIs for this month.
Domestically, oil prices, the trajectory of bond yields and individual stock movements will drive the stock market.
