Crypto crisis: how digital currencies went from boom to collapse | Cryptocurrencies | The Guardian

yuri popovich had seen his neighbors’ houses burn to the ground in kyiv and needed a safe place to put his money. she so she did what millions of amateur investors have done in recent years: she turned to cryptocurrencies.

“it was impossible and insecure to store funds in the form of banknotes. there was a great risk of theft, we also had cases of looting. therefore, I trusted a “stable and reliable” cryptocurrency. not for the purpose of speculation, but simply to save, ”she says.

Reading: Isn bitcoin booming

The digital asset Popovich chose in April was Terra, a “stable coin” whose value was supposed to be pegged to the dollar.

crashed in May, causing a rout in the cryptocurrency market whose victims include popovich. lost $10,000 (£8,200).

popovich says his losses were “devastating,” though donations from sympathetic viewers on social media have helped make up some of the shortfall. he says: “I stopped sleeping normally, I lost 4 kg, I often have headaches and anxiety.”

popovich is one of many experiencing the deep chill of the current crypto winter, more than four years after market cornerstone bitcoin marked the first digital freeze by falling from its peak.

After that, it had a long tear, but it came to an abrupt halt, with bitcoin dipping below the $20,000 mark at one point this month, well below its peak of nearly $69,000, which it reached last November. .

The drop has been sharp and dramatic: a global market that was estimated at more than $3 trillion just six months ago is now worth less than $1 trillion.

The rise of cryptocurrencies: a new digital economy

The beginnings of the latest cryptocurrency boom had all the makings of another instance of the “robinhood economy,” named after the popular American stock trading app.

Bored white-collar workers, stuck at home due to pandemic shutdowns but awash in disposable income, have turned to day trading as a way to pass the time. Subscribers to the r/wallstreetbets forum on the popular online discussion site reddit doubled over the course of 2020 and then quadrupled in the first month of 2021, as a small army of retail investors flooded into assets as varied as the then betting company. bankrupt car rental hertz, troubled video game retailer gamestop and electric car maker tesla, taking the latter from $85 at the start of the pandemic to a high of $1,243 towards the end of 2021.

Cryptocurrencies also benefited from the increase in day trading. bitcoin skyrocketed from a low of $5,000 in March 2020 to over $60,000 a year later. the coin has had that kind of headlong surge before: in 2017, it had surged 20-fold, to its high of $19,000. But in the latest boom, Ethereum, the number two cryptocurrency, had an even more impressive rise, from just $120 to a high of nearly $5,000 in 2021.

cryptocurrency is the name of any digital asset that works like bitcoin, the original cryptocurrency, which was invented in 2009. there is a “decentralized ledger”, which records who owns what, built into a “blockchain”, which secures the entire network by ensuring that transactions are irreversible once made. In the years since then, a dizzying number of variations have emerged, but the core, the blockchain concept, is remarkably stable, in part due to the societal implications of truly decentralized networks being immune to oversight or regulation. of the government.

Where, 10 years ago, people were just talking about trading bitcoin, the space has exploded. as well as the cryptocurrencies themselves, the sector has developed into a complex ecosystem.

encompasses web3, a broader selection of apps and services built on top of cryptocurrencies, defi, an attempt to start an entire financial sector out of code instead of contracts, and non-fungible tokens (nfts), which use the same technology as cryptocurrencies to trade objects instead of money.

The avalanche of money that poured into the world of cryptocurrencies did more than just inflate the paper wealth of pre-existing shareholders. instead, it sparked a surge in interest and funding for the wide range of projects that aimed to capitalize on the underlying technology of cryptocurrencies.

For a generation of new investors, the industry’s “decentralized finance” opportunities were alluring. Built on the “programmable money” of the ethereum cryptocurrency, the “defi” [decentralized finance] sector is an attempt to expand the anti-establishment spirit of bitcoin to cover the entire economy.

Take the comparatively small sector of the crypto market known as nfts.

A product dating back to 2014, nfts takes the technology used to create cryptocurrencies, but allows creators to link unique assets to the blockchain, rather than money-like currencies.

That means nfts can be traded that represent artwork, virtual collectibles, or even double as event tickets or club memberships. and like cryptocurrencies, they can be bought or sold on open exchanges, held pseudonymously, and packaged or securitized into complex financial instruments.

See also: PayPal, Venmo and CashApp simplify cryptocurrency for beginners – CNET

a boom within a boom, individual nfts sold for ridiculous amounts of money in mid-2021.

one token, representing years of work by digital artist beeple, sold for $69 million; Another, linked to the first tweet sent by Twitter founder Jack Dorsey, was bought for $2.9 million. Individual nfts in the bored ape yacht club collection, the most desired examples of “profile picture” nfts, designed to be used as a pre-packaged online identity, regularly selling for $1 million-$3 million each.

but by early 2022, the nft bubble seemed to have burst. “floor” prices for large nft collections had plummeted and while many large nft acquisitions have remained in private collections, those that have been put back on the market have done poorly – tweet by Dorsey withdrew from the sale after achieving a top offer of just $14,000.

and then: the accident

The crypto crisis has played out against the backdrop of broader market woes, as fears over the Ukraine conflict, rising inflation and higher borrowing costs haunt investors. Some market watchers play down the possibility that a crypto crisis will trigger serious problems elsewhere in the financial markets or the world economy. the total value of all cryptocurrencies is roughly $1 trillion today (with bitcoin making up around 40% of the total), which compares to roughly $100 trillion for world stock markets.

Since November, the value of all cryptocurrencies has fallen from $3 trillion, meaning $2 trillion worth of wealth has disappeared, with no serious fallout on the broader stock market, until now. moment.

teunis brosens, chief economist for digital finance at Dutch banking, says that the traditional financial system is relatively well protected because established banks, the cornerstones of the financial world that collapsed in 2008, are not exposed to crypto for the sake of it. they do. they don’t have digital assets on their balance sheets, unlike in the financial crisis when they had toxic debt products related to the housing market.

“what has happened in the cryptocurrency market has caused great losses to some investors and it is very painful and it is not something that I want to minimize,” he says. “but it would be exaggerating the role that crypto currently has in the economic and financial system if I thought that there could be systemic consequences for the financial system in general or even a global recession caused directly by crypto assets.”

To date, the turmoil has been limited to the cryptocurrency sector. digital assets have been affected by some of the same economic problems that have plagued the global economy and stock markets in general. Bitcoin and other cryptocurrencies have been hit by concerns about rising inflation and subsequent interest rate hikes by central banks, making risky assets less attractive to investors. this meant that as stock markets declined, so did crypto assets.

But last month’s terra crash also affected confidence in cryptocurrencies. In June, a cryptocurrency lender, celsius, was forced to stop customer withdrawals. and a hedge fund that made big bets on the crypto markets slipped into liquidation.

crypto investors and companies that had placed bets on the crypto market using digital assets as collateral were forced to sell.

kim grauer, head of research at cryptocurrency data firm chainalysis, says: “it was a combination of the stock market plus the kind of overreaction that is typical of crypto markets because of these cascading selloffs. in this case , the key event was terra.”

added: “cryptocurrencies are not going away. and it has experienced more severe shocks than this.”

Regulators and various government agencies are watching closely. harry eddis, global co-head of fintech at linklaters, a london-based law firm, says recent events in the crypto asset market will strengthen regulators’ resolve to rein in the industry.

“I think it will certainly stiffen the sinews of regulators in saying that they are more than justified in regulating the industry, because of the obvious risks with many of the crypto assets,” he says.

In the UK, the financial watchdog continues to expand protection measures for crypto products. His latest proposals on marketing crypto products to consumers could lead to significant restrictions on crypto exchanges operating in the UK. Consumers reported 4,300 possible crypto scams on the financial conduct authority website over a six-month period last year, well ahead of the second-place category, pension transfers, which had 1,600 reports. the fca has 50 ongoing investigations, including criminal investigations, into companies in the sector.

The collapse of terra has also raised regulatory concerns about stablecoins, because they are backed by traditional assets and therefore could pose a risk to the broader financial system. in the uk, the treasury wants a regime in place to deal with a stablecoin collapse, saying in may that a terra-like failure could jeopardize the “continuity of services critical to the operation of the economy and people’s access to their funds or assets. ”.

“Even the top three stablecoins have reserves totaling $140 billion in traditional assets, much of it in commercial paper and US Treasuries. a run on swaps of the largest currency (tether) could destabilize the entire crypto asset system and spread to other markets,” says carol alexander, professor of finance at the university of sussex business school.

Elsewhere, the eu is drawing up a regulatory framework for crypto assets with the goal of introducing them by 2024, while in the us. In the US, Joe Biden signed an executive order directing the federal government to coordinate a regulatory plan for cryptocurrencies that includes ensuring “sufficient oversight and protection against any systemic financial risk posed by digital assets.” The federal trade commission, the body US Consumer Watch says 46,000 people have lost more than $1 billion due to cryptocurrency scams since the beginning of 2021.

In general, regulators have been speaking harshly about cryptocurrencies. the fca chairman has called for “strong safeguards” to be put in place for the crypto market, while the head of the us financial regulator has warned consumers about crypto products that promise returns that are “too good to be true”, while that singapore has said it will be “brutally and relentlessly tough” on misconduct in the crypto market.

‘I’m sure cryptocurrencies will bubble again

See also: Why Do Bitcoins Have Value? | NextAdvisor with TIME

Where does crypto go from here is an unanswered question. For proponents like changpeng zhao, the billionaire owner of cryptocurrency exchange binance, the sector is sure to recover, although it could take some time. “I think given this price drop…it’s probably going to take a while to come back,” he told the Guardian last week. “It will probably take a few months or a couple of years.”

For the skeptics, however, the plummeting could be a lasting wound. “Bitcoin will be around for decades,” says david gerard, author of the 50ft blockchain attack. “All you need is the software, the blockchain, and two or more enthusiasts. Unless there is a new strict regulation, I am sure that cryptocurrencies will bubble again. but if there is a genuine consumer bubble, it may not rise to the heights of this one. the 2021-22 bubble made it to the super bowl. As many dot-coms discovered 20 years ago, there’s nowhere to go from there: it’s reached every consumer in America.”

But one thing both sides agree on is that the dividing line between “survivable recession” and “crypto-apocalypse” likely involves neither bitcoin nor ethereum, but rather the third largest cryptocurrency: a stablecoin called tether.

Stablecoins are a critical part of the crypto ecosystem. its value is pegged to that of a conventional currency, allowing users to withdraw money from risky positions without going through the hassle of a wire transfer, and allowing native crypto banks and defi establishments to operate without taking on foreign exchange risk .

In essence, stablecoins work like the banks of the crypto economy, allowing people to safely deposit their money knowing that it is not exposed to increased risk. meaning that when a stablecoin collapses, it has an effect very similar to a bank failure: money disappears throughout the ecosystem, liquidity dries up, and other institutions start to fail in a domino effect.

The start of the latest cryptocurrency crisis was triggered by exactly that: the failure of the terra/luna stablecoin.

The algorithmic checks and balances put in place to keep it stable were broken, triggering a death spiral.

and so on may 9th, a stablecoin called ust “depegged”, falling from $1 to $0.75 in a day, and then falling further and further and further. Within four days, the luna blockchain was completely shut down and the project was declared dead.

a domino effect took out other crypto establishments. Some of the “contagion” has been averted, in part, thanks to huge loans made by Alameda Ventures, the investment arm of 30-year-old crypto billionaire Sam Bankman-Fried’s empire. Drawing comparisons to jp morgan in the panic of 1907, “sbf” has stepped in to support crypto bank voyager and beleaguered exchange blockfi, and has loudly called for the support of others.

Unlike terra, Tether is a “centralized” stablecoin, maintaining its value through reserves that the company says can always be redeemed one-for-one for a Tether token. the model means that it can’t go into a “death spiral” like terra, but it also means that the stability of the token depends entirely on how much tether is trusted to hold its reserves.

that trust is not a sure thing. Tether once claimed that he held all of his reserves in “US dollars,” a claim that the New York Attorney General’s office concluded in 2021 to be “a lie.”

tether and bitfinex, a bitcoin exchange that shares an executive team with but is legally distinct from tether, “recklessly and illegally covered up massive financial losses to keep their scheme going and protect their bottom line,” letitia james , the new york attorney general said at the time.

The two companies had transferred money back and forth to cover up the insolvency, he said, and had failed to ensure that Tether was “fully backed at all times,” the investigation concluded.

“tether has been the market time bomb since 2017,” says gerard. “has reduced its market capitalization by $15bn in the last month, and has claimed that this is either redemptions or a reduction of its ‘commercial paper’ holdings,” he says, referring to one of the key assets that tether uses. on its balance sheet: commercial paper, short-term debt issued by banks and corporations to cover immediate financing needs.

tether, for its part, remains extremely optimistic, and has even suggested it could release a formal audit of its reserves, something it said would be “months away” in August 2021.

In late June, Tether announced another expansion: the introduction of the first ever GBP stablecoin. “We believe the UK is the next frontier for blockchain innovation and the wider implementation of cryptocurrencies for financial markets,” says Paolo Ardoino, CTO of Tether and Bitfinex.

“tether is ready and willing to work with UK regulators to make this goal a reality.”

more regulation and greater market volatility are a fact.

popovich says he still gets donations. “I am extremely embarrassed. yesterday an anonymous person sent me $50 in the form of cryptocurrency. And I’ve never borrowed anything from anyone in my life. I’m scared and restless.”

See also: Surfing Bitcoin Maximalism – Bitcoin Magazine – Bitcoin News, Articles and Expert Insights

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