• Wed. Jun 22nd, 2022

Bitcoin and other cryptocurrencies are on the decline. The future is murky.

ByHazel R. Lang

May 13, 2022
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Over the past few days, several cryptocurrencies have seen their prices crash to near-historical levels.

The impact was rapid and widespread. Nearly 40% of bitcoin holders have lost money on their investment, Data from crypto intelligence firm Glassnode shows. More than a quarter of the global cryptocurrency market has evaporated, according to crypto analytics website CoinMarketCap. The selloff comes after terraUSD, the cryptocurrency that pegs its value to the US dollar via an algorithm, started trading below $1.

Since then, investors in major cryptocurrencies have sold their shares, sending prices plummeting to levels not seen since 2020. Amidst this, industry analysts, pundits and cryptocurrency critics have been looked at the impact of the drop on the digital currency, noting the crash could be a red flag on the risk level of digital assets.

To learn more, The Washington Post spoke with Ben McMillan, Chief Innovation Officer of IDX Insights, a cryptocurrency asset management firm, as well as Molly White, a developer. software that runs the website. Web 3 is going great.

“We’re going to see consolidation in the industry,” McMillan said. “We kind of saw this movie before with internet stocks in the 90s. There was a period of euphoria where the Pets.comIt all went away and the Amazons survived.

The conversation has been edited for length and clarity.

Why is cryptocurrency crashing right now?

McMillan:This weekend, there was a crypto-specific event in the form of the terra luna stablecoin that basically broke the ball. Stable coins are a very important part of the crypto ecosystem, they are meant to be stable. They are supposed to have an individual valuation with the US dollar. This is where many investors take refuge in times of volatility.

Terra was a so-called algorithmic stablecoin that had a market capitalization of nearly $20 billion. But there was just over a billion dollars worth of bitcoins as supposed collateral. So there were a lot of terra luna stablecoins out there that just weren’t backed by anything other than other people’s faith in this system. So what happened was that there was just a good old fashioned run on the shore.

It’s a death spiral – once a stablecoin breaks off like that. Over the weekend and Monday morning, this began to catalyze the entire digital asset ecosystem. It was just kind of a straw that broke the camel’s back.

White: Realistically, I don’t think you can say crypto is literally dead. But I think maybe we’re seeing more of a mass realization that it’s not such a good idea to invest in crypto, especially with money that’s not just money fun and which is actually important, in terms of your actual investments, our ability to pay the bills.

The pink lenses stand out a bit. On the one hand, people were looking at those projects that promised 20% returns – like terra – for example. Suddenly they saw what happened when things started to go wrong. And now there is no more money for the people of terra. I wouldn’t be surprised if the public perception drops a bit and we stop seeing some of the huge hype and huge big-ticket crypto sales and things like that. I don’t think it’s very realistic to say that crypto will die, blockchains will disappear, and crypto won’t exist. There’s still a lot of money in it, despite what the market is doing.

McMillan: Crypto is therefore not dead. But that only highlights to investors that this is a risky asset class. It is also being questioned how investors think about it. Many investors thought of it as a digital version of gold or as an inflation hedge. Really, bitcoin and digital assets trade like high-tech stocks. So I think there has been a repositioning of how investors view bitcoin, both in terms of portfolio fit and risk.

I think we’re going to see a consolidation in the industry. We’ve kind of seen this movie before with internet stocks back in the 90s. There was a period of euphoria where Pets.comIt all went away and the Amazons survived. We will have the weakest projects that will not succeed, and investors will be much more selective about where they put capital. Venture capitalists are going to be much more selective with the projects they support. Daily users will be much more discerning about where they put their funds.

How does this crash affect industry regulation?

White: I think it came at the right time because there were lawmakers looking at stablecoins and starting to say, “These look pretty flimsy.” I think this has caught the attention of regulators and legislators to some degree because they see people losing that money unprotected, and they see these stablecoins actually threatening things outside of the crypto market . They kind of started thinking that maybe it’s something we need to pay attention to now.

And there doesn’t seem to be too much regulation they could pull the trigger on today, which would change things immediately. But we have seen regulatory attention towards stablecoins.

McMillan: So regulators are already looking at stablecoins as sort of an obvious area to focus on again, which makes sense. This is where Main Street meets the crypto universe. Stablecoins are where most people get into crypto. It is therefore important that there are standards in terms of transparency and collateralisation.

This collapse of the third-largest stablecoin by market capitalization over the weekend has absolutely accelerated the mission of regulators to really start setting standards around stablecoins and stablecoin issuance. I think it will probably end up looking a lot like what we see with banks. I wouldn’t be surprised if regulators require stablecoin issuers to be FDIC insured, have minimum collateral ratios, and [have] minimum standards for transparency.

Will bitcoin prices rise further? How low could they go? Should I “buy the dip?”

McMillan: Yes, when we look at the next five to 10 years, when we look at what is developing on the various blockchains, including Bitcoin and Ethereum, when we see the power of this technology, it is impossible not to be optimistic. Now, that doesn’t mean it’s going to be an upline. That doesn’t mean it won’t be a volatile path. That doesn’t mean we’re not going to have 50% drawdowns every year. But, especially at these levels, when you start to get into some pretty depressed territory and there’s a lot of bad news prices, it’s hard not to see bitcoin prices not rising in a year or two.

White: It is difficult to forecast the markets at a reasonable level. With crypto they are so volatile they are so unpredictable and they are so far from reality to some extent that it is possible that you are buying the dip but it could also mean that you are buying on the dip and they can always to lower. People trying to buy the dip, I think, are not very wise. And they put themselves at a lot of risk in a situation that started to go wrong fairly recently and could go wrong for a long time to come.


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