Cryptocurrency woes: when the bottom gives out

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Cryptocurrencies have dropped, and it has been a spectacular rout. New lows were hit by Bitcoin, the world’s largest cryptocurrency, that fell around the $20,000 level, a far cry from the days it was closing in on the $70,000 level not so long ago.

Several leading cryptocurrencies, including Ethereum (ETH), Cardano (ADA), Solana (SOL) and Dogecoin (DOGE) experienced even heavier losses than bitcoin, falling by between 15-25 per cent in just 24 hours.

Practically overnight, an entire industry of digital assets imploded, wiping off billions for investors, and lending weight to many who had warned against amassing digital assets.

For those catching up, cryptocurrencies are digital coins that are exchanged using networks of computers that verify transactions, rather than a centralised entity like a bank.

For years, they have been marketed as an alternate currency or rather a hedge against inflation caused by central banks flooding the economy with money. Bitcoin, the most valuable cryptocurrency, has a built-in limit to its supply.

Earlier, The New York Times reported that Coinbase – the largest US crypto exchange – was cutting 18% of its employees, after layoffs at other crypto companies like Gemini, BlockFi and Crypto.com.

High-profile start-ups like Terraform Labs too imploded, erasing years of investments. An experimental crypto bank, Celsius, briefly halted operations, curbing withdrawals, transfers and swaps. Bitcoin too, did the same the following day.

Also read: Bonfire of bitcoin: Why crypto assets are tumbling

A sell-off at such a massive scale exposes a few elements:

Institutional lenders, who previously shunned digital currencies, are in fact the ones who secured finances against the assets. This then unwittingly tied cryptocurrency to industry variables, which are now in part dictating its fall, including dictating individual investor sell-offs.

Some rays of hope:

This has happened before. Bitcoin experienced a similar crash in 2018, where it lost roughly 80% of its value. It succeeded in reaching new heights giving investors much to be hopeful about.

It is understood that the market is reacting to external variables. High inflation, slow economic growth, the war in Ukraine and rising interest rates may have spooked investors into selling off risky assets such as cryptocurrency, indicating that this could be temporary crash and not an indicator of much more than a slump.

It’s come too far to be wiped away entirely. The global financial meltdown of 2008 too marked an upturn within 2 years.

Digital assets may not necessarily replicate the way a stock market posts a recovery — may or may not be gradual. Cryptocurrency may rise again at a different scale. They may perhaps make themselves risk-averse by placing hedges or enacting measures to curb extreme volatility. This could include a central banking system or regulatory bodies.

Alternately, it may just be a correction phase, simply because it grew too fast – as the series of layoffs indicate.

No rays of hope:

Like with any investments, digital assets carry a fair amount of risk.

Since it is a relatively new enterprise, there isn’t enough of a trajectory to be able to predict which way the coins will fall, so to speak. A conservative investor may want to monitor the trends and industry a while before taking a plunge or turning to more fiscally consistent assets such as stocks or bonds.

The S&P 500 entered its second bear market this week – when stocks drop more than 20% off a recent high – instilling more mistrust in investors.

The US Federal Reserve raised its target interest rate by three-quarters of a percentage point earlier this week to stem a disruptive surge in inflation. This was the biggest announced by the US central bank since 1994, and delivered after recent data showed little progress in its battle to control a sharp spike in prices.

Following this move, if another recession is on the horizon, this may very well reflect in the digital asset market also.

The article does not necessarily reflect the opinion of Business Recorder or its owners