The cryptocurrency market is facing severe pressure from rising U.S. inflation and potential interest rate hikes. Recently, Bitcoin and Ethereum prices fell sharply, dragging the total global cryptocurrency market capitalization below the $1 trillion mark—a decline of about 70% from its peak. Ethereum (ETH) is now approaching $1,000, while Bitcoin is nearing $20,000.
This downturn is accelerating a deleveraging process within the crypto ecosystem. Over the past two years, the rise of derivative products—such as cryptocurrency lending—has significantly increased leverage across digital asset markets. As prices plummet and deleveraging intensifies, assets like Ethereum are experiencing depegging effects, further fueling pessimistic market expectations.
Why Prices Are Falling Rapidly
“After multiple crises this year, the digital currency market has shown clear signs of fatigue. The recent steep declines are not surprising,” noted a veteran cryptocurrency investor based in Zhejiang.
Bitcoin and Ethereum, which had been weakening throughout the year, suddenly accelerated their decline in recent days, breaking through several key support levels. Bitcoin approached $20,000, while Ethereum—the second-largest cryptocurrency—fell even more sharply, nearing the $1,000 threshold.
The slump of these two major cryptocurrencies triggered a broader sell-off. Data shows that the total crypto market cap briefly fell below $900 billion on June 15, a significant drop from its November 2021 peak of $2.8 trillion.
Beyond internal factors affecting the crypto space, higher-than-expected U.S. inflation data is considered a key trigger for the recent sell-off. With U.S. CPI reaching 8.6% year-over-year in May—a 40-year high—market participants anticipate more aggressive interest rate hikes from the Federal Reserve.
According to data from the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 1.0% month-over-month and 8.6% year-over-year, the highest annual increase since December 1981. Core CPI, which excludes food and energy, increased by 6.0% annually and 0.6% monthly.
Professor Hu Jie of Shanghai Jiao Tong University's Advanced Institute of Finance, and a former senior economist at the Fed, noted: “The drop in Bitcoin and Ethereum began on the 13th, so expectations around Fed policy explain part of the decline. But that’s not the whole story—much of it stems from the cryptocurrency’s own market cycle.”
Ethereum’s “Depegging” Crisis
The rapid decline across digital assets has triggered a spiral of deleveraging throughout the market.
Zhang Guangfeng, a well-known blockchain researcher, pointed out that the collapse of UST—the world’s third-largest stablecoin—in May had a profound impact. It not only heightened caution among investors but also raised concerns that similar incidents could recur, making deleveraging a necessary strategy for many.
On June 10, ETH and its staked derivative, stETH, experienced severe depegging. Several institutions began selling stETH, triggering panic selling that resulted in stETH trading at a more than 20% discount to ETH.
Insiders revealed that global liquidity conditions have been tight this year. Incidents like the UST collapse caused substantial losses for many institutions, forcing them to sell assets like stETH to meet liquidity needs. However, the broader challenge facing the crypto market is accelerated deleveraging.
Data indicates that the stETH-ETH ratio remains around 0.95, indicating that the depegging has not yet been resolved. stETH is a staking derivative that is normally pegged 1:1 to ETH. The depegging is closely linked to the market’s rapid deleveraging.
Ethereum, the world’s second-largest blockchain, is undergoing a major upgrade. To participate, investors must stake their ETH to earn rewards and validation rights—but staked ETH cannot be withdrawn until the upgrade is complete, creating temporary liquidity challenges.
To address this, platforms like LIDO allow users to stake ETH and receive stETH in return. Users who stake any amount of ETH receive an equivalent amount of stETH and earn an annual yield of around 4.5%.
The Ethereum upgrade, known as “The Merge,” will combine the Ethereum mainnet with the Beacon Chain. Once complete, each stETH will be redeemable for one ETH.
During the bull market, many investors considered the 4.5% annual yield too low. Instead, they used stETH as collateral to participate in other investments, amplifying returns through leverage.
“This created a cyclical process that allowed investors to apply multiple layers of leverage, generating returns far above 4.5%,” said Zou Chuanwei, Chief Economist at Wanxiang Blockchain.
However, as markets tumbled, this leveraged cycle turned toxic. Many investors began deleveraging, and mass selling of stETH became commonplace.
Insiders also noted that investors are concerned about potential delays in Ethereum’s Merge. Moreover, with ETH prices falling sharply, staking ETH on LIDO has become less attractive. stETH must trade at a discount to ETH to offer any safety margin for investors.
Zhang Guangfeng compared stETH to a futures contract. The significant depegging from ETH reflects continued pessimism about the future.
The Dangers of Leverage
Since 2020, the cryptocurrency market has expanded rapidly. New ecosystems emerged around Bitcoin and Ethereum, including products like crypto lending that increased market leverage.
In blockchain-based lending, users must collateralize assets to borrow. When the collateral value exceeds the loan amount, the system functions smoothly. But when collateral value falls below the loan value, risk increases sharply. If the value drops below a certain threshold, smart contracts automatically trigger liquidation, forcibly selling the collateral.
This creates a feedback loop: liquidations increase selling pressure, driving prices lower, which in turn increases lending risk and leads to more liquidations.
Because this process is automated, it executes quickly and decisively, causing significant market impact. This is often referred to as a “death spiral.”
Zhang Guangfeng noted that innovation in the cryptocurrency market has improved liquidity but also increased leverage. However, unlike traditional financial systems, the crypto market has fewer underlying assets and weaker scalability, making it more vulnerable to downturns. As most crypto profits come from secondary market trading, volatility is higher, leading to more pronounced price swings.
Data from OKLink shows that on June 14, the total liquidation volume in decentralized finance (DeFi) lending reached $130 million, the highest level since the beginning of 2022.
Professor Hu Jie emphasized the need for caution: “While many new financial service models have been created that support decentralized finance and improve the flow of capital and assets, some projects suffer from flawed design. The cryptocurrency and derivatives markets face serious information asymmetry, and many investors and borrowers lack professional expertise. Protecting investor rights, preventing price manipulation, and improving regulatory frameworks are urgent issues that the market must address.”
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Frequently Asked Questions
What caused the recent crash in cryptocurrency prices?
The decline was driven by a combination of macroeconomic factors—including high U.S. inflation and expectations of interest rate hikes—and internal market dynamics such as deleveraging and loss of confidence following the collapse of major stablecoins.
How does deleveraging affect cryptocurrency markets?
Deleveraging involves reducing borrowed funds, which often forces investors to sell assets to cover obligations. This selling pressure drives prices down, which can trigger further liquidations and create a destructive cycle known as a “death spiral.”
What is stETH and why did it depeg from ETH?
stETH is a token representing staked Ethereum. It depegged due to a loss of confidence, liquidity issues, and mass selling by investors looking to reduce risk and leverage during the market downturn.
Are all cryptocurrencies equally affected by market cycles?
No. Major cryptocurrencies like Bitcoin and Ethereum often lead market trends, but altcoins and DeFi tokens can experience even higher volatility due to lower liquidity and higher speculative trading.
What should investors consider during high market volatility?
Investors should assess their risk tolerance, avoid overleveraging, diversify holdings, and stay informed about macroeconomic trends and regulatory developments affecting digital assets.
How can participants stay updated on market changes?
Following reliable data sources, understanding technical and fundamental indicators, and using professional analysis tools can help investors navigate rapidly changing market conditions. 👉 Get advanced market insights