The bottom fell out of the cryptocurrency market last week, wiping out more than $300 billion in a sell-off that underscored the risks of the unregulated digital currencies. Bitcoin fell below $27,000, its lowest point since 2020, as part of a larger trend that saw cryptocurrency exchange Coinbase lose half its value. The stablecoin TerraUSD “imploded.” The panic has been described as the biggest reset in cryptocurrencies since Bitcoin fell by 80 percent in 2018. But the current crash is more severe, since far more people and institutions are investing in digital currencies today.
During the COVID-19 pandemic, “people have flooded into virtual currencies, with 16 percent of Americans now owning some, up from 1 percent in 2015,” writes The New York Times, citing a Pew Research survey.
Major financial institutions, including Northern Trust and Bank of America, have taken positions in the controversial cryptocurrencies, as have some hedge funds, NYT says. While “early investors are still probably in a comfortable position,” the rapid declines of the past week have “been especially acute for investors who bought cryptocurrencies when prices surged last year.”
Some critics say a collapse has been long overdue, while others compared the steep fall off to “the start of the 2008 financial crisis,” says NYT, quoting Mizuho Group fintech analyst Dan Dolev calling it “the perfect storm.”
While part of a more general tech stock decline — described by NYT as “a broader pullback from risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine” that also hurt valuations of such companies as Zoom and Netflix — “crypto’s decline is more severe” than the overall stock market fall.
“While the S&P 500 is down 18 percent so far this year, Bitcoin’s price has dropped 40 percent in the same period,” NYT explains, noting that “in the last five days alone, Bitcoin has tumbled 20 percent, compared to a 5 percent decline in the S&P 500.” How long crypto’s descent might continue is anyone’s guess. “Cryptocurrency prices have typically rebounded from major losses, though in some cases it took several years to reach new heights.”
By Friday, Bitcoin had again crept above the key $30,000 mark, prompting Defiance ETFs’ CEO and CIO Sylvia Jablonski to tell CNBC that “Bitcoin was back to behaving like an equity, though she stressed ongoing uncertainty surrounding other cryptocurrencies, like Terra’s UST stablecoin. “We have a lot of near term chaos,” Jablonski told CNBC, adding that “when you get this news now about Terra and the sister coin, Luna, crashing, that just creates this absolute wall of worry.”
CNET writes that “last week, a Luna coin was worth $85. Now it’s worth a penny,” which matters because UST stablecoin “is designed to retain a value of one U.S. dollar at all times.” As summarized by CNET: “Billions of dollars in crypto wealth has been vaporized, sending shockwaves throughout the whole market.”
Terra Collapse Could ‘Accelerate’ Crypto Regulation by Legislators, Yahoo Finance, 5/16/22
$3 Billion in Bitcoin Was Sold in a Last-Ditch Attempt to Save UST Stablecoin from Collapse, CNBC, 5/16/22
Crypto Funds Saw Year’s Highest Inflows as Terra Crisis Crashed Markets, CoinDesk, 5/16/22