What caused crypto ‘bonfire’

The meteoric adoption of crypto assets has inflated a volatile sector – but this week investors saw the market “heading to the edge of a cliff”. Here’s why.

The meteoric adoption of crypto assets like bitcoin has recently inflated a volatile sector to a valuation of around two trillion dollars.

A week-long rout wiped out tens of billions of dollars of that value and sent panic to the market.

The bitcoin blues

Bitcoin is the premier cryptocurrency and its value accounts for the lion’s share of the entire industry.

This week, its price dropped at one point to US$25,500 – less than half its all-time high in November last year and the lowest valuation since its late 2020 explosion.

“Fears of runaway inflation and the abrupt end of the era of cheap money have pushed cryptocurrencies to the edge of a cliff,” said Susannah Streeter of Hargreaves Lansdown, referring to the new policies of monetary tightening by the US Federal Reserve and other central banks.

She said the new environment had caused investors to “steer away from risky assets”.

Bitcoin began to fall along with tech company stocks, but the collapse was most pronounced in the volatile crypto sector.

Many other coins also lost value, including the second largest importer, ether, which fell by a third over the week.

Not so stable coins

Since the biggest cryptocurrencies are notoriously volatile, entrepreneurs have invented a theoretically more reliable alternative known as stablecoins.

These coins, which constitute a market of around $180 billion according to a March estimate by the US Fed, are pegged to the US dollar or other fiat currencies.

But this week one of the biggest, terra, dramatically lost its peg to the dollar and plunged to just 10 cents at one point on Friday.

Terra is one of many such coins that relies on a complex mechanism of exchanges in other cryptocurrencies to support its peg, rather than being backed by funds in fiat currencies.

Analysts including JP Morgan have warned that terra’s death spiral raises broader questions about the viability of algorithm-based stablecoins.

The “potential collapse” has also “soured crypto investor sentiment” more broadly, the US bank said in a note to clients.

Companies cringe

PayPal’s decision to accept bitcoin in late 2020 helped spark a precipitous rise in the value of crypto assets, driven in part by a sense that digital tokens could one day function as currencies.

But closing crypto payments remains notoriously expensive, time-consuming, energy-intensive, and unreliable.

Nonetheless, crypto firms have seen their values ​​skyrocket – none more so than Coinbase, an exchange licensed in the US and listed on the New York Stock Exchange in April last year.

Its shares were worth more than $400 each at one point, but this week they barely beat US$50.

“Volatility is inevitable. We can’t control it, but we plan for it,” Coinbase boss Brian Armstrong wrote in a blog post Thursday.

“I just know we’ll make it through, and we’ll come out stronger than ever if we focus on what matters: building.”

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