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The future of cryptocurrency is bleak. Over the last seven days, the Crypto Markets Crash made the price of bitcoin to fall by over 29%, while ethereum has fallen by 38%, and virtually every other cryptocurrency has followed the trend. This is according to Coinmarketcap’s data, which shows that since November 2021, the combined value of the cryptocurrency market has dropped by about 70 percent.
The tether stablecoin, a cryptocurrency designed to maintain parity with the US dollar and supposedly backed by dollar reserves, has lost its peg and, at the time of writing, trades for 99 cents a unit. Big layoffs have been announced by major crypto companies, starting with Coinbase.
As of this writing, Kaiko, an insights firm, claims that Celsius, a lending platform, has invested $475 million of its customers’ funds in stETH, a synthetic asset that can theoretically be exchanged for the leading cryptocurrency, Ethereum.
Crypto Markets Crash
There was a ripple effect in the cryptocurrency industry when the stablecoin Terra Luna went down last month, too. On Monday, the S&P 500 index fell by 3.5% and the Nasdaq by 4.2%, respectively.
Some 16 percent of Americans have purchased cryptocurrency in the past two years, and now might be the time to start panicking. However, the general reaction to this drop among crypto heavyweights ranges from zen to blase.
To represent the crypterati who survived the 2018 crypto crash, Bankless’ Twitter account created a meme in which James Franco is shown on the scaffold, wearing a noose and asking two weeping crypto holders from the year 2022 if this is their “first time” there.
Tweets by crypto cynics liken confident cryptocurrency investors to a peaceful dog drinking coffee in an engulfed shack on fire. As flames threaten to engulf it, the dog responds, “This is fine.” I know it will pass.
You wouldn’t expect a downturn in the blockchain industry if you looked at the fundamentals—blockchain adoptions and user expansion, as well as real-world use cases being discovered—says His Excellency. A stablecoin created by Justin Sun, Grenada’s ambassador to WTO and creator of the TRON blockchain, also lost its peg to the US dollar last week.
Fear, uncertainty, and doubt (FUD) is rife in the market right now, and the recent insolvency issues of some DeFi platforms and funds out there aren’t helping either. My faith in rational expectations and the market’s self-correction, however, remains firm. We are at the precipice of a new cycle, and cycles come and go.
There may be a silver lining in this crisis if you look at bitcoin, Tether’s chief technical officer, Paolo Ardoino said last week. Perhaps Bitcoin is more stable and less susceptible to volatility than other coins. The price of Bitcoin fell 60%, but the price of other altcoins fell significantly more. As a result, Ardoino says, “Bitcoin is showing much more resiliency.” The “alt-coins” may remain in a state of decline for the foreseeable future, but bitcoin may begin to rise.
Inflation Making the Situation Worser
A major red flag is the fact that cryptocurrencies, which have been promoted as inflation- and market-hedging assets, are behaving exactly like the stock market as a whole. Coincidences between the Bitcoin crisis and the Netflix stock debacle were drawn by Ardoino himself, who noted that Netflix stock plummeted 40% in a day due to poor subscriber numbers earlier this year.
Despite the fact that the lines between cryptocurrencies and traditional stocks have become increasingly blurred, Outlier Ventures CEO Jamie Burke believes crypto has been behaving exactly like a stock in recent months. Cryptocurrency’s dizzying price rises and feverish hype have drawn in a large amount of new capital, which institutional and retail investors are spending on stock-trading platform Robinhood with their stimulus money.
The wider macroenvironment began to be linked to digital assets, says Burke. Many new dollars entered the financial system and were immediately put to use for speculation, which benefited cryptography in the process. In the same way, when the macroeconomic environment changes, digital assets suffer.
Also, I’m thinking that crypto might enjoy more extreme highs and extreme lows when there is good news. So, for example, if Russia declared peace, I expect the price of crypto to rise. Why? Is it logical? “I’m not quite sure, but I think so,” he says.
There is another way to look at it: Cryptocurrency was never a hedge for inflation or anything else. A part of a much larger financial system, it was always doomed to become just that. “Risk-on” assets, according to BitOoda’s chief strategy officer Sam Doctor, now include crypto. A logical progression from high-risk technology stock investments to more obscure crypto assets would be for investors looking for a safe haven to stash their cash.
It is “fine” for the market to take some risk now that interest rates are so low, according to Doctor. He claims that when interest rates rise and inflation takes a bite out of a portfolio, crypto is the first thing to go. For the first time, bitcoin is being examined to see if it can act as an inflation hedge. In other words, the markets tell us no.”
One can only place so much blame on macroeconomic and stock market turmoils for cryptocurrencies’ downward trend, however. In some cases, the pain is likely self-inflicted, as well. A good case in point is the recent demise of “algorithmic stablecoin” Terra Luna, which, according to Elliptic, lost nearly 99 percent of its value in May, wiping out $42 billion in investor funds.
Terra Luna was supposed to be pegged to the dollar. Hard cash was not necessary to maintain Terra’s dollar parity. Economists had pointed out that this mechanism could not work unless there was an increase in demand for the asset on a continuous basis. The currency crumbled when people started withdrawing large sums of money. (Several requests for an interview with Terra’s creator, Do Kwon, went unanswered).
A large investment in Terra, Celsius is now experiencing liquidity issues, and all withdrawals have been suspended over the weekend. (Emails, texts, and voicemails left for executives at Celsius went unanswered.) However, in the past few years, a market that was awash in money was looking for new places to invest, and as a result, schemes with questionable economic fundamentals were attracted to capital.
Even though terra luna and celsius’ teams are not solely responsible for the downturn, it would be unfair to point the finger at them alone. Major crypto players have supported ventures that even at face value were peddling dubious products because there was no strong regulation in place. Allaire, the founder of Circle, a stablecoin company licensed as a money transmitter in 46 US states, is scathing in his criticisms.
The responsibility of exchanges, for example, is unclear. “If customers want it, they’ll put it on,” he says of the company’s philosophy. What they put on their shelves is up to them; they have a duty to do so.” No, baby formula and rat poison are not on the same shelf.
CEO of the world’s first exchange Binance Changpeng “CZ” Zhao thinks otherwise. “Should we make a comprehensive list?” A week after the terra luna meltdown, he tells me, “I don’t know.” As far as I know, the Nasdaq has dropped Netflix. Isn’t a stock exchange something we should have?” He claims that the Terra Luna team did not engage in any “intentional scamming behavior,” and he is still optimistic about algorithmic stablecoins. Terra Luna received a $3 million investment from Binance in 2018.
“Let’s step back and look at the bigger picture. CZ claims that no currency in use today has lasted more than 300 years. It took about three years for Terra Luna to come to an end.
It is hoped that the current financial crisis will help people learn more about who they can and can’t trust. Some believe it could also help to rid the industry of the weaker, frothier projects. One of the most common analogies used is that of the dotcom bubble bursting and leaving behind the Amazons and the eBays. For Kristin Smith, executive director of the Blockchain Association’s lobbying group, these bear markets are good for crypto because they make investors humble.
“It’s going to benefit everyone in the long run.” She also claims that regulators are paying attention and will act more quickly now that they have clear examples of what can go wrong.
Not all cuckoo crypto finance has been extinguished just yet. In the words of Ardoino, “people are stupid. “They’ll do it all over again. In the traditional financial industry, people go long and short on futures contracts all the time. The amount of information you can impart is limited.”