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Monday, September 26, 2022

Fear and hysteria combine to create the “perfect storm” that causes the collapse of cryptocurrency markets

The value of one bitcoin has fallen to a level not seen since the year 2020. The value of the bitcoin exchange Coinbase, which is rather significant, plummeted. The value of a cryptocurrency that advertised itself as a reliable method of trade dropped dramatically. And since Monday, a drop in cryptocurrency prices has wiped off more than $300 billion in market capitalization.

This week, the cryptocurrency market saw a full-scale crisis, which was accompanied by a sell-off that clearly demonstrated the hazards associated with the unregulated and experimental digital currencies. Even while celebrities such as Kim Kardashian and IT moguls such as Elon Musk have talked up cryptocurrency, the rapid falls of virtual currencies like as Bitcoin and Ether illustrate that in certain circumstances, two years’ worth of financial gains may be erased in a single night.

This fear led to the worst reset in the cryptocurrency market since Bitcoin’s price dropped by 80 percent in 2018. However, this time around, the lowering prices will have a wider effect since a greater number of individuals and organisations are holding the currencies. Some market participants have likened the current state of panic and dread to that which prevailed at the beginning of the global financial crisis in 2008, while others have argued that the collapse was long overdue.

According to a poll conducted by the Pew Research Center, the percentage of individuals who hold some kind of virtual currency has increased to 16 percent, up from 1 percent in 2015. This increase occurred during the epidemic caused by the coronavirus. Large financial institutions such as Northern Trust and Bank of America joined the fray, as did hedge funds, with some of the former group utilising loans to further inflate the value of their cryptocurrency wagers.

The early investors undoubtedly still find themselves in a satisfactory situation. However, the steep reductions that have occurred this week have been particularly painful for investors who purchased cryptocurrencies during the period of time when values were surging.

The decline in cryptocurrency prices is one facet of a larger flight from risky assets, which has been fueled by increasing interest rates, inflation, and the economic uncertainty brought on by Russia’s invasion of Ukraine. These elements have contributed to a so-called pandemic hangover, which began when life in the United States began to return to normal. This has had a negative impact on the stock values of firms such as Zoom and Netflix, which profited during lockdowns.

When a mysterious person who called himself Satoshi Nakamoto established Bitcoin in 2008, this event is considered to be the beginning of the cryptocurrency industry. The digital money was positioned as a decentralised alternative to the conventional banking system in the popular imagination. Proponents of Bitcoin chose to conduct transactions among individuals and record each one on a shared ledger called a blockchain rather than depending on gatekeepers like banks to enable business. These gatekeepers include financial institutions such as banks.

Prices for cryptocurrencies hit an all-time high before the end of 2017 but have subsequently declined as concerns about the economy have grown. This week, though, an implosion of a stablecoin known as TerraUSD added fuel to the fire of the market crash. Stablecoins, which are designed to be a more trustworthy method of exchange, are often tied to a stable asset such as the United States dollar, and its value is not supposed to fluctuate. Stablecoins are a relatively new kind of cryptocurrency. The purchase of more cryptocurrencies might be accomplished using them by several traders.

TerraUSD was supported by reputable venture capital companies such as Arrington Capital and Lightspeed Venture Partners, both of which contributed tens of millions of dollars to the funding of cryptocurrency businesses that were based on the currency. Kathleen Breitman, one of the creators of Tezos, a cryptocurrency platform, said that this provided “a false feeling of security to folks who would not otherwise know about these things.”

However, TerraUSD was not supported by conventional assets like as currency, treasuries, or any other traditional assets. Instead, the stated stability of its value was generated from algorithms that tied it to the value of a related cryptocurrency known as Luna.

The volatility very soon grabbed the attention of authorities in Washington, who had already been keeping an eye on stablecoins. In a study that was published in the autumn of 2017, the Treasury Department requested that Congress develop regulations for the ecosystem of stablecoins.

At the same time, other areas of the cryptocurrency ecosystem began to deteriorate. The cryptocurrency exchange Coinbase, which is one of the biggest in the world, said on Tuesday that it had suffered a quarterly loss of $430 million and that it had lost more than two million active customers. Since making a successful introduction to the market in April 2021, the price of the company’s shares has decreased by 82%.

Some experts have expressed their belief that any sense of fear may be exaggerated. According to the findings of a research conducted by Mizuho, the typical Bitcoin owner using Coinbase would not start losing money until the price of the digital currency dropped below $21,000. According to Mr. Dolev, it is the point at which a genuine death spiral might take place.

Professional investors who have experienced crypto volatility in the past have also maintained their composure. This week, more than 70 financial advisors got together with Hunter Horsley, the chief executive of Bitwise Asset Management, to talk about the market. Bitwise Asset Management offers crypto investment services to a total of 1,000 financial advisers. He said that many were not selling since the value of every other asset had also decreased. Some others were even attempting to make money off of the decline.

Cryptocurrency dealers have been shaken to the core despite the falling prices. Proponents of blockchain technology projected as recently as a few months ago that the price of Bitcoin might reach as high as $100,000 by the end of this year.

David Faber
I am a Business Journalist of The National Era
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