Even in a market notable for its volatility, cryptocurrencies have seen a wild descent over the past few months, with individual digital tokens falling to two-year lows and the overall industry now losing nearly $2 trillion. dollars worth since the end of the last year.
Some champions of the realm say the crisis is only part of the evolution of crypto and point to similar upheavals since the early days of internet businesses, which eventually found a somewhat more stable path.
But what exactly is driving the recent decline in cryptocurrency values and what might or might not it tell us about where the digital currency world is headed?
The overall economy is in the tank: When it comes to tough times, the cryptocurrency market isn’t alone in seeing steep declines from a very recent stretch of salad days when consumers were teeming with cash, interest rates were low and the world was finally emerging from the restrictions imposed by the COVID-19 pandemic.
Everything is in the rearview mirror at the moment, as US inflation continues to rise to 40-year highs and the Federal Reserve works to thwart soaring consumer prices by raising its interest rate by benchmark, as it did on Wednesday, this time by a whopping 0.75. %, the largest increase since 1994.
A ton of money has been poured into crypto investments throughout the pandemic, but as national and global economies began to show signs of heading south, finicky crypto owners bailed out in droves, taking with them them a market value charge when exiting. gate.
When a hedge is not a hedge: Once widely touted as a hedge against inflation and volatile stock market fluctuations, cryptocurrencies have instead proven to be more similar than not to good old speculative stock trading.
Jamie Burke, CEO of venture capital fund Outlier Ventures, said the crypto is behaving exactly like a stock and the two are moving in parallel because the lines between them have blurred, according to Wired. Skyrocketing prices and feverish hype around the crypto have sucked in a lot of new money as institutional and retail investors are spending their stimulus money on stock trading platform Robinhood.
“Digital assets started to be tied into the larger macro environment,” Burke told Wired. “A lot of money has entered the financial system. They started using it to speculate, so crypto definitely benefited. But similarly, when the broader macro environment changes, it is negatively reflected in digital assets.
Ships at low tide: As crypto stocks have fallen, companies that adopted strategies that relied heavily on continued increases in value are showing their cracks.
Celsius, which takes cryptocurrency deposits from individuals and lends them out, stopped withdrawals as it faces financial issues, according to NPR. Binance, a cryptocurrency exchange, halted bitcoin withdrawals for several hours last Monday.
The Celsius issues are undermining confidence in the broader cryptocurrency space just weeks after a stablecoin called TerraUSD collapsed, per NPR, and crypto firms are responding by reassessing their plans for the future.
One of the most active US crypto exchanges, San Francisco-based Coinbase caused a stir when it went public in April 2021, gaining a valuation of around $100 billion. Its stock has been sledding since last November and, as of the end of regular trading on Friday, had a market capitalization of around $11.4 billion.
Now the company, which mediates transactions for those looking to buy, sell, transfer or store over 100 different cryptocurrencies, is making drastic reductions in its workforce and, according to company management, is adapting to which could be an extended lull for digital tokens.
Coinbase CEO Brian Armstrong pointed to a possible recession and the need to manage Coinbase’s burn rate and increase efficiency, according to CNBC. He also said the company grew “too quickly” during a bull market.
“We seem to be entering a recession after an economic boom of more than 10 years. A recession could lead to another crypto winter and could last for an extended period,” Armstrong said in an email to CNBC.
He added that past crypto winters have resulted in a significant drop in trading activity.
“While it is difficult to predict the economy or the markets, we always plan for the worst so that we can operate the business in any environment,” Armstrong said.
Not bad at all : Billionaire tech entrepreneur Mark Cuban is a fan and investor in cryptocurrencies and their underlying blockchain technology. and internet companies hit in the early 2000s, according to Marketwatch,
Crypto is going through the lull the internet has been experiencing. After the initial wave of exciting apps, NFT, DeFi, P2E, we saw the copycat phase as chains subsidized the movement of these apps to their chains (a.k.a. bandwidth and storage subsidies by startups in the years 2000)
— Marc Cuban (@mcuban) May 9, 2022
Cuban believes that the dip in value will have a cleansing impact on the entire crypto sector, weeding out companies that have failed to strategize on sound business practices.
“In stocks and crypto, you’ll see companies that were backed by cheap, easy money — but didn’t have good business prospects — will disappear,” the ‘Shark Tank’ investor says. and owner of the Dallas Mavericks at Fortune this week. “As (Warren) Buffett says, ‘When the tide goes out, you can see who’s swimming naked.’”
And, Cuban believes new opportunities for crypto entrepreneurs will arise in turbulent times.
“Disruptive apps and technologies released during a bear market, whether in stocks, crypto or any business, will always find a market and be successful,” Cuban told Fortune.
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What’s Behind The $2 Trillion Cryptocurrency Crash? Mark Cuban Has An Answer
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