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Why Another “Crypto Winter” Is A Test For Digital Money


The latest digital asset crisis has been heartbreaking for investors who bought at the top last year. Even crypto diehards, while still convinced that the world is on the verge of a blockchain-driven financial revolution, have been shaken by the market rout. For those still keeping the faith, “crypto winter” will be like the dotcom bust of the early 2000s – weeding out failing companies to make room for more promising startups. Others wonder if spring will ever come.

1. What is a crypto winter?

It is similar to a bear market for other assets. Stocks are in a bear market when a benchmark index falls by at least 20% over a period of at least two months. Crypto winters often feature dramatic declines, followed by long periods of low prices and low trading volumes. A crisis that began in 2018 wiped out up to 88% of the market value of all crypto assets, according to tracker CoinMarketCap. This time around, they’ve dropped 68%.

2. What causes crypto winters?

In their short life, crypto markets have become synonymous with exuberant booms and panic-driven crashes. Bitcoin lost about two-thirds of its value in 2014, partly due to the failure of a major crypto exchange. In 2018, a regulatory crackdown on initial coin offerings caused thousands of new cryptocurrencies to disappear, sending valuations plunging again.

3. How did this one happen?

This time, forces beyond the crypto world were partly responsible. When central banks eased monetary policy in response to the coronavirus pandemic, investors crowded into blockchain startups and digital assets. Later, when central banks began to reverse course, crypto assets crashed, exploding the idea that they enjoyed a similar status to gold as a safe haven for investors in times. of economic uncertainty. The initial crisis triggered the collapse of the stablecoin TerraUSD (a digital token designed to maintain a peg to the US dollar). This in turn led to the failure of hedge fund Three Arrows Capital, crypto broker Voyager Digital, and crypto lender Celsius Network, among others. Prices fell further in the following weeks as investors wondered how far the contagion might spread. Between Bitcoin’s November peak and the end of June, $2 trillion was wiped off the combined market value of crypto assets.

4. Why was it so brutal?

Even by the industry’s own volatile standards, it was a spectacular rout. The crypto was supposed to have come of age from when it was obsessed with a core of “true believers” and shunned by most investors. The implosion of TerraUSD, Celsius and others has come as a shock to pension fund and sovereign wealth fund managers – and millions of retail investors – who have embraced crypto in recent years, as well as venture capitalists. -venture that had funneled tens of billions of dollars into crypto startups at astronomical valuations. It turns out that the bull market of the past few years was built on shaky foundations, as many investors borrowed heavily to bet on coins and digital projects, often using other cryptos as collateral.

5. What was the impact?

Critics see the crisis as proof that these assets are still too risky to have a place in conventional investment portfolios. Even crypto cheerleader Elon Musk took a step back: his electric car company Tesla Inc. sold 75% of its Bitcoin holdings. More than six months into winter, crypto exchange volumes were still low and low trading activity made it harder for crypto startups to raise capital. Companies were laying off staff, including exchanges Gemini Trust and Coinbase Global Inc. and non-fungible token market OpenSea. The harm done to institutional investors and retail investors has put governments under more pressure to slide crypto into the same orbit as traditional finance, with improved regulatory oversight to prevent more disasters.

6. What are the prospects?

It is too early to tell if the turmoil is over. Meanwhile, some crypto startups with feasible business plans are running out of money. Many crypto miners who play a vital role in ordering transactions on blockchains – the digital ledgers that underpin crypto – are in distress as the value of the tokens they earn no longer cover their operating costs. It is now clear that crypto assets are as vulnerable to rising interest rates as other investments such as tech stocks. (The crypto crisis mirrored a similar drop in the tech-heavy Nasdaq Composite Index.) This has given ammunition to critics who view crypto as a purely speculative investment.

Crypto has a rebound history. Just as the latest downturn led to the emergence of now powerful players such as the FTX exchange, companies that survive the current crypto winter will have fewer competitors and more room to mature and improve their offering. Growing regulatory repression, while adding to short-term uncertainty around crypto, could eventually make it a more respectable and stable asset class.

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