Crypto World went into a complete crash this week in a sell-off that graphicly illustrated the risks of experimental and unregulated digital currencies. Even celebrities like Kim Kardashian and tech moguls like Elon Musk have talked about crypto, with the rapid collapse of virtual currencies like Bitcoin and Ether showing that, in some cases, two-year financial gains could disappear overnight.
The moment of panic since Bitcoin prices fell 80% in 2018 was the amount of the worst reset in cryptocurrency. But this time, price reductions have far-reaching effects because more people and organizations hold the currency. Critics say the fall was long overdue, with some traders comparing fears and anxieties to the onset of the 2008 financial crisis.
“It’s like a perfect storm,” said Dan Dolev, an analyst who covers the Mizuho Group’s crypto companies and financial technology.
During the coronavirus epidemic, people were flooded with virtual currency, with 16% of Americans now owning something, up from 1% in 2015, according to a Pew Research Center survey. Big banks like Northern Trust and Bank of America have also streamed with hedge funds, some using loans to further juice their crypto bets.
Early investors are probably still in a comfortable position. But the sharp fall this week has been particularly sharp for investors who bought cryptocurrencies when prices rose last year.
The collapse of the cryptocurrency is part of a larger recovery from risky assets, rising interest rates, inflation and the economic uncertainty caused by Russia’s invasion of Ukraine. These factors complicate a so-called epidemic hangover that began as soon as life returned to normal in the United States, hitting the stock prices of companies like Zoom and Netflix, which prospered during the lockdown.
But the collapse of crypto is more serious than the widespread sinking in the stock market. While the S&P 500 has fallen 18% so far this year, Bitcoin has fallen 40% over the same period. In the last five days alone, Bitcoin has fallen 20% compared to a 5% drop in the S&P 500.
It is unknown at this time what he will do after leaving the post. Cryptocurrency prices have generally rebounded due to large losses, although in some cases it has taken several years to reach new heights.
“Is it Lehman Brothers?” It is difficult to say, said Charles Cascarilla, founder of blockchain company Paxos, referring to financial services companies that went bankrupt at the beginning of the 2008 financial crisis. “It will take us some more time to figure it out. You can’t respond at this speed.”
Cryptocurrency originated in 2008, when a shadowy personality who called himself Satoshi Nakamoto created Bitcoin. Virtual currency was portrayed as a decentralized alternative to the traditional financial system. Instead of relying on gatekeepers such as banks to facilitate trade, Bitcoin proponents prefer to conduct transactions among themselves, recording each one on a shared ledger called a blockchain.
Prominent technology leaders, including Musk, Jack Dorsey, a Twitter founder, and Mark Andreessen, an investor, embraced the technology as it evolved from a fancy curiosity to a culture-like movement. The value of cryptocurrency has exploded, creating a new class of crypto billionaires. Other types of cryptocurrencies, including ether and doscoin, caught the public’s attention, especially during epidemics, when the extra cash in the financial system led people to day trades for entertainment.
Cryptocurrency prices peaked late last year and have declined as fears over the economy have grown. But this week, when TeraUsD, a stablecoin, exploded, the solution gained momentum. Stablecoins, which are meant to be a more reliable means of exchange, are usually pegged to a stable asset, such as the US dollar, and are intended to prevent price fluctuations. Many traders use them to buy other cryptocurrencies.
TerraUSD has the support of trusted venture capital firms, including Arrington Capital and Lightspeed Venture Partners, which have invested millions of dollars in financing crypto projects built on the currency. Kathleen Britman, one of the founders of the crypto platform Tejos, said, “It gives a false sense of security to those who would not otherwise know about these things.”
But TerraUSD was not supported by cash, treasury or other traditional assets. Instead, it derives its supposed stability from algorithms that associate its value with a sister cryptocurrency called Luna.
This week, Luna has lost almost its full value. This immediately had a knock-on effect on TerraUSD, which fell to a low of 23 cents on Wednesday. As investors panicked, Teether, the most popular stablecoin and a lynching pin in crypto trading, also moved away from its own $ 1 peg. Tether fell as low as 95 cents before recovering. (Supported by Tithar Cash and other traditional assets.)
The instability quickly drew attention to Washington, where stablecoins are on regulators’ radar. Last fall, the Treasury Department issued a report urging Congress to make rules for the stablecoin ecosystem.
“We really need a regulatory framework,” Treasury Secretary Janet Yellen told a congressional hearing Thursday. “Over the last few days, we’ve demonstrated a real-life risk.”
Stablecoins “present the same kind of risk we have known for centuries in the case of bank runs,” he added.
At the same time, other parts of the crypto ecosystem have deteriorated. On Tuesday, Coinbase, one of the largest cryptocurrency exchanges, reported a quarterly loss of $ 430 million and said it had lost more than 2 million active users. The company’s stock price has fallen 82% since its winning market debut in April 2021.
Brian Armstrong, CEO of Coinbase, tried to reassure customers on Twitter that the company was not at risk of going bankrupt after panic spread over the necessary legal disclosures about the company’s property ownership.
The price of cryptocurrency has also fallen sharply. Bitcoin prices fell as low as ,000 26,000 on Thursday, down 60% from its November high, before rising slightly. Since the beginning of the year, Bitcoin price movements have closely reflected Nasdaq, a benchmark that weighs heavily on technology stocks, suggesting that investors consider it as any other risky asset.
The price of ether has also plummeted, losing more than 30% of its value last week. Other cryptocurrencies, such as Solana and Cardano, are also down.
Some analysts say the panic could be exacerbated. A survey by Mizuho shows that the average Bitcoin owner of Coinbase will not lose money until the price of the digital currency falls below $ 21,000. According to Dolev, that’s where the real death spiral could happen.
“Bitcoin worked until no one lost money,” he said. “Once it’s back to that level, it’s the ‘Oh, my God’ moment.”
Professional investors who have endured crypto volatility in the past have also been quiet. Hunter Horsley, CEO of Bitwise Asset Management, which provides crypto investment services to 1,000 financial advisers, met with more than 70 of them this week to discuss the market. Many were not selling, he said, because all other assets were also scarce. Some were trying to capitalize on the drop.
“Their point of view is, ‘It’s not fun, but there’s nowhere to hide,'” he said.
Still, falling prices have upset crypto traders. Just a few months ago, blockchain proponents predicted that the price of Bitcoin could rise by as much as 100,000 this year.
“I never thought things would get so ugly,” said Ed Moya, a crypto analyst at trading firm Wonder.