Crypto Crash is Testing Investor’s Faith in Bitcoin, Luna and Other Digital Assets

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Amid a collapse in the prices of many cryptocurrencies this week, Washington Nationals fans may have seen an odd tweet from the baseball team’s account. “Crypto 101”, is reading, while an embedded video played clips of Nats stars in action and a voiceover introduced basics of digital money. “You have questions. We have answers.”

Terra, the cryptocurrency company that sponsored the tweet, could have started by answering a few questions about itself.

The company earlier this year signed a five-year, $40 million promotional deal with the Washington baseball team that includes introducing its cryptocurrency as a payment method at the stadium as early as next year. However, this digital currency, a type of cryptocurrency known as a stablecoin because it aims to keep its price at $1, is in freefall this week. TerraUSD, or UST as it is known, was trading as low as 30 cents on Wednesday morning before rebounding to 80 cents on Wednesday night.

It is still unclear what caused the UST to go into a tailspin. But the crater of what had been the third-largest stablecoin by total market cap points to a broader calculus for a hype-fueled asset class that is deflating as dramatically this year as it inflated in 2021.

A sell-off in the past seven days has wiped out more than a quarter of the value of the global cryptocurrency market, according to CoinMarketCap. More dramatically, UST’s sister coin Luna has lost over 90% of its value in the past week, nearly wiping out most people who have invested in it.

And general interest in cryptocurrency trading appears to be cooling off. Coinbase, the largest U.S.-based cryptocurrency trading platform, reported a first-quarter loss of $430 million on Tuesday as its stock continued to tumble, down 79% this year. The exchange reported that its monthly active users dropped to 9.2 million in the first quarter of this year, down from 11.4 million in the previous quarter.

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Bitcoin, the world’s most popular cryptocurrency, dropped below $30,000 on Wednesday, down more than 56% from its all-time high in November. It is now trading near its 2021 low, meaning most investors who bought it when popular interest in crypto surged last year are now in the red in their investments. In total, an estimated 40% of bitcoin holders are submerged in the asset, according to a new analysis by cryptocurrency analytics firm Glassnode.

Ethereum, also widely held, has more than tripled since December 2020 but is down 54% since its all-time high six months ago. However, the most popular stablecoin, Tether, has not seen its value drop below one dollar. It doesn’t use algorithms like UST; the latter is an unorthodox method that essentially relies on trades rather than assets to back it up, which can be responsible for its downfall.

The drop in cryptocurrency prices follows a broader move by investors to jettison risky assets such as tech stocks as the Federal Reserve raises interest rates to fight inflation. The tech-heavy Nasdaq has dropped 10 percent since Thursday. Giants like Netflix and Meta are among the companies that have been hit hardest in 2022 – Netflix is ​​down 75% in the last six months, while Meta, the parent company of Facebook, is down 45% over that period.

But the downturn in the cryptocurrency market is particularly painful for the fledgling industry. It comes at a time when industry leaders have seen the technology gain the kind of institutional adoption they hope will irreversibly push it into the financial mainstream.

Institutional players have overtaken retail investors on Coinbase, for example. Family traders accounted for a third of volume on the platform last year, down from 80% in 2018, according to new Morgan Stanley research. And Wall Street firms continue to enter the industry. Goldman Sachs in March executed its first over-the-counter bitcoin options trades; BlackRock announced last month that it is investing in stablecoin company Circle Internet Financial.

Tyler Gellasch, founder of the non-profit Healthy Markets Association, said that traditional financial institutions have missed too many years of high cryptocurrency values ​​to be deterred from the cryptocurrency market now. “Concerns about fraud, volatility and regulatory uncertainty have kept many traditional financial companies on the sidelines of the digital asset boom,” he said. “After several years of losing profits, many in traditional finance have recently committed to getting involved in digital asset markets. I’ll be surprised if they immediately turn around now. They committed a lot of resources to figuring out how to offer something to their customers.”

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Cryptocurrency’s challenges could also tarnish some of the entities that have aligned themselves with it. The NBA, for example, has gambled heavily on this, with the Warriors, Mavericks and Heat all making extravagant deals with cryptocurrency companies — a potential optical problem as all three teams play postseason games this week. The specter of companies like Coinbase (the league’s official crypto platform partner) and FTX (which has arena branding deals with Warriors and Heat) pushing their services like the industry’s craters is an odd look at a league that likes to position themselves as younger and smarter than their counterparts.

Some academic experts say volatility is nothing new in cryptocurrency and have warned against reading a fundamental significance for this week’s crash or the biggest drop in the past six months.

“We’ve seen this movie before,” said David Yermack, a professor of finance and business transformation at New York University’s Stern School of Business who closely studies cryptocurrencies and economics. “There was a big drop in 2014, and in 2018 there was a ‘crypto winter’ and a lot of smaller episodes in between. It’s just very volatile. And we can see that again – in both directions.”

He said he does not foresee any contagion to the larger economy or other investments. “The total market cap of the crypto economy is $1.3 trillion, much less than what people invest in stocks and real estate,” Yermack said. “This is mostly speculation by young people taking a chance on winning a big payday.”

These people, however, were feeling the pain, especially from Luna. A Reddit forum dedicated to the coin this week featured grim stories of people who say they have lost money with the Earth currency.

“I lost $15,000,” wrote a user named No-Forever2056. “I got greedy hoping to get more money so I could at least pay a down payment on a house for my family. I guess no home and savings then.

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Another, known as CryptographerTop8162, wrote: “my friend and former colleague (my manager for 15 years) attempted to commit suicide this morning. He basically transferred all of his savings to cryptocurrencies in 2021 and LUNA was a big player in his portfolio.”

Other financial giants are signaling that they see no reason not to make it easier for ordinary Americans to invest in cryptocurrencies, despite backlash from Washington policymakers. Fidelity Investments said last month that it will become the first major retirement plan operator to allow investors to put some of their 401(k) savings into bitcoin. The announcement drew criticism from the Department of Labor and two Democratic senators — Elizabeth Warren (Mass.) and Tina Smith (Minn.) — who wrote to the company asking it to address the “significant risks of fraud, theft and loss” associated with the assets. .

Warren said this week’s collapse in cryptocurrency prices underlines the danger for retirees. “We cannot put Americans’ savings and retirement at risk when unregulated and unstable cryptocurrency betting fails,” she said in a statement.

But Fidelity showed no signs of backing down. Company spokesperson Eric Sandwen said Fidelity is offering “a responsible solution for plan sponsors who want to meet the demands of the general interest in cryptocurrencies and provide their employees with exposure to digital assets.” He said the company is providing “institutional consumer protections,” including limits on investment and education, and will continue to discuss the matter with policymakers.

But Fidelity’s 20% limit on the amount of bitcoin a 401(k) account can hold is not seen as a limitation. Morningstar senior research analyst Madeline Hume called the cap “quite generous based on asset class volatility,” adding that Morningstar, an influential investment research firm, does not recommend cryptocurrencies to investors focused on their investment. retirement.

“The tide of investor sentiment can change quickly, as we’ve seen,” Hume said. And investors don’t have the protection offered by more regulated investment tools. “There is no prevention against insider trading in cryptocurrencies at this time. Investors may be trading behind the flow of information in the market, which is a significant risk.”

Some say a longer vision will reward those with a greater risk appetite. Professional cryptocurrency investors note that the sector has weathered dips before and that continued sell-off was inevitable. “Prices had to come back to reality, and they did,” said Abraham Chaibi, co-founder of cryptocurrency trading firm Dexterity Capital. “This is not an existential crisis for cryptocurrencies by any means.”

Jeremy Epstein, chief marketing officer at decentralized finance firm Radixit, which also runs two cryptocurrency investment funds, said he believes observers should keep a longer technological history in mind.

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“If you look at the dot-com era, Webvan and Pets dot-com quickly fell and disappeared as well,” he said. “But that didn’t mean we wouldn’t want to buy groceries or pet supplies online. It was just the wrong implementation at the wrong time.”

The cryptocurrency crash has not spurred further impetus to create clearer federal rules for assets. But the UST implosion is drawing more scrutiny. The coin relies on complex financial engineering to maintain a stable price, and cryptocurrency sleuths are still debating the chain of events that began over the weekend when the UST dropped to 99 cents. The company did not respond to a request for comment.

Federal Reserve Chair Janet L. Yellen, testifying before the Senate Banking Committee on Tuesday, said her fate highlighted the threat unregulated stablecoins can pose to the entire financial system. “It simply illustrates that this is a fast-growing product,” she said, hours before the Nats posted their Terra-sponsored tweet, “and that there are risks to financial stability, and we need an appropriate framework.”

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