Cryptocurrencies Melt In Perfect Storm Of Fear And Panic

Bitcoin price has dropped to its lowest point since 2020. Major cryptocurrency exchange Coinbase has plummeted in value. A cryptocurrency that promoted itself as a stable medium of exchange has collapsed. And more than US$ 300 billion (R$ 1.52 trillion) has been decimated by the fall in cryptocurrency prices since Monday (9).

The cryptocurrency world collapsed this week in a sell-off that clearly illustrated the risks of experimental, unregulated digital currencies. Even as celebrities like Kim Kardashian and tech moguls like Elon Musk have talked about cryptocurrencies, the accelerating decline of virtual currencies like bitcoin and ether shows that, in some cases, two years of financial gains can disappear overnight.

The panic moment was the worst cryptocurrency reset since bitcoin plummeted 80% in 2018. But this time the price drop has a broader impact, as more people and institutions hold coins. Critics said the collapse was long overdue, while some traders compared the alarm and fear to the onset of the 2008 financial crisis.

“It looks like the perfect storm,” said Dan Dolev, an analyst covering cryptocurrency and fintech companies at the Mizuho Group.

During the coronavirus pandemic, people flocked to virtual currencies, with 16% of Americans now owning some, up from 1% in 2015, according to a Pew Research Center survey. Big banks like Northern Trust and Bank of America have also jumped on the bandwagon, along with hedge funds, some using debt to further increase their bets on cryptocurrencies.
Early investors are probably still in a comfortable position. But this week’s rapid declines were especially sharp for investors who bought cryptocurrencies when prices surged last year.

The cryptocurrency slump is part of a broader pullback in risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine. These factors exacerbated the so-called pandemic hangover, which began as life began to return to normal in the United States, hurting the stock prices of companies like Zoom and Netflix, which thrived during the lockdowns.

But the cryptocurrency’s decline is more severe than the broader stock market slump. While the S&P 500 is down 18% so far this year, the price of bitcoin is down 40% over the same period. In the last five days alone, bitcoin has dropped 20%, compared to a 5% decline for the S&P 500 index.

It is unclear how long the cryptocurrency meltdown could last. Their prices recovered from heavy losses, although in some cases it took several years to reach new heights.
“It’s hard to say, ‘Is this Lehman Brothers?'” said Charles Cascarilla, founder of blockchain firm Paxos, referring to the financial services firm that went bankrupt at the start of the 2008 financial crisis. to find out. Can’t answer that fast.”

Cryptocurrency prices peaked late last year, and have since fallen as fears about the economy grew. But the collapse gained momentum this week as TerraUSD, a stablecoin, imploded. Stablecoins, which are supposed to be a more reliable medium of exchange, are typically pegged to a stable asset, such as the dollar, and should not fluctuate in value. Many traders use them to buy other cryptocurrencies.

TerraUSD has been supported by trusted venture capital firms, including Arrington Capital and Lightspeed Venture Partners, who have invested tens of millions of dollars to fund cryptocurrency projects built on the currency. This gave “a false sense of security to people who would not otherwise know about these things,” said Kathleen Breitman, one of the founders of cryptocurrency platform Tezos.

But TerraUSD was not backed by cash, Treasury bonds or other traditional assets. Instead, it extracted its supposed stability from algorithms that linked its value to a sister cryptocurrency called Luna.

This week, Luna has lost almost all of its value. This immediately had an indirect effect on TerraUSD, which dropped to a low of US$0.23 (R$1.1) on Wednesday (11). As investors panicked, tether, the most popular stablecoin and mainstay of cryptocurrency trading, also faltered against its own $1 peg. Tether dropped as low as $0.95 (R$4.8) before rebounding. (Tether is backed by cash and other traditional assets.)

Other parts of the crypto ecosystem soured at the same time. On Tuesday (10), Coinbase, one of the largest cryptocurrency exchanges, reported a quarterly loss of $430 million (R$ 2.17 billion) and said it had lost more than two million active users. The company’s share price has dropped 82% since its triumphant market debut in April 2021.

Brian Armstrong, CEO of Coinbase, tried to reassure customers on Twitter that the company was not in danger of going bankrupt after a required legal disclosure of ownership of its assets sparked panic.

Cryptocurrency prices have also dropped precipitously. Bitcoin price dropped to $26,000 on Thursday (12), down 60% from its November peak, before rising a bit. Since the beginning of the year, bitcoin’s price movement has closely mirrored that of the Nasdaq, a heavily skewed benchmark for tech stocks, suggesting investors are treating it like any other risky asset.

The price of ether has also plummeted by more than 30% in the last week. Other cryptocurrencies such as solana and cardano also dropped.

Any panic could be overblown, some analysts said. A study by Mizuho showed that the average bitcoin owner on Coinbase would not lose money until the price of the digital currency dropped below $21,000. This, according to Dolev, is where a true death spiral can occur.

“Bitcoin was working as long as nobody lost money,” he said. “Once you get back to those levels, it’s kind of the ‘Oh my God’ moment.”

Translated by Luiz Roberto M. Gonçalves