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Cryptocurrencies are melting in a ‘perfect storm’ of fear and panic


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A sell-off that gained momentum this week clearly illustrated the risks of experimental and unregulated digital currencies.

A crash in cryptocurrency prices wiped out over $300 billion in value this week. Samuel Corum for The New York Times

SAN FRANCISCO — The price of bitcoin plunged to its lowest level since 2020. Coinbase, the big cryptocurrency exchange, fell in value. A cryptocurrency that billed itself as a stable medium of exchange has collapsed. And more than $300 billion has been wiped out by a crash in cryptocurrency prices since Monday.

The crypto world went into complete meltdown this week in a selloff that graphically illustrated the risks of experimental, unregulated digital currencies. Even though celebrities like Kim Kardashian and tech moguls like Elon Musk have talked about crypto, the accelerating decline of virtual currencies like bitcoin and ether shows that, in some cases, two years of financial gains can disappear overnight.

The moment of panic represented the worst cryptocurrency reset since bitcoin fell 80% in 2018. But this time the price crash has a wider impact as more people and institutions hold the currencies. Critics said the collapse was long overdue, while some traders compared alarm and fear to the onset of the 2008 financial crisis.

“It’s like the perfect storm,” said Dan Dolev, an analyst who covers crypto companies and fintech at Mizuho Group.

During the coronavirus pandemic, people have flocked to virtual currencies, with 16% of Americans now owning them, up from 1% in 2015, according to a Pew Research Center survey. Big banks like Northern Trust and Bank of America have also poured in, along with hedge funds, some using debt to optimize their crypto bets.

Early investors are probably still in a comfortable position. But the rapid declines this week were particularly acute for investors who bought cryptocurrencies when prices surged last year.

The fall in cryptocurrencies is part of a broader pullback in risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine. Those factors compounded a so-called pandemic hangover that began as life began to return to normal in the United States, hurting stock prices of companies like Zoom and Netflix that thrived during the shutdowns.

But the decline in crypto is more serious than the broader stock market plunge. While the S&P 500 is down 18% year-to-date, the price of bitcoin has fallen 40% over the same period. In the past five days alone, bitcoin has fallen 20%, compared to a 5% drop in the S&P 500.

The duration of the crypto crash is unclear. Cryptocurrency prices have generally rebounded from significant losses, although in some cases it has taken several years to reach new highs.

“It’s hard to say, ‘Is it Lehman Brothers?’,” said Charles Cascarilla, founder of blockchain company Paxos, referring to the financial services company that went bankrupt at the start of the crisis. 2008 financial year. “We are going to need more time to understand. You cannot respond to this type of speed.

The origins of cryptocurrencies date back to 2008, when a shadowy figure calling himself Satoshi Nakamoto created bitcoin. Virtual currency was presented as a decentralized alternative to the traditional financial system. Rather than relying on gatekeepers like banks to facilitate trade, bitcoin proponents preferred to conduct transactions among themselves, recording each on a shared ledger called the blockchain.

Prominent tech leaders, including Musk, Twitter founder Jack Dorsey, and Marc Andreessen, an investor, have embraced the technology as it transitioned from novel curiosity to cult movement. The value of cryptocurrencies has exploded, creating a new class of crypto-billionaires. Other forms of cryptocurrency, including ether and dogecoin, have caught the public eye, especially during the pandemic, when excess liquidity in the financial system led people to trade day to have fun.

Cryptocurrency prices peaked late last year and have since slipped as fears about the economy grew. But the collapse accelerated this week when TerraUSD, a stablecoin, imploded. Stable coins, which are meant to be a more reliable medium of exchange, are usually pegged to a stable asset such as the US dollar and are intended not to fluctuate in value. Many traders use them to buy other cryptocurrencies.

TerraUSD had the backing of credible venture capital firms, including Arrington Capital and Lightspeed Venture Partners, which have invested tens of millions of dollars to fund crypto projects based on the currency. It gave “a false sense of security to people who otherwise might not know about these things,” said Kathleen Breitman, one of the founders of Tezos, a crypto platform.

But TerraUSD was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that tied its value to a sister cryptocurrency called luna.

This week, Luna has lost almost all of its value. This immediately had a ripple effect on TerraUSD, which fell to a low of 23 cents on Wednesday. As investors panicked, tether, the most popular stablecoin and the kingpin of crypto trading, also dropped its own peg to $1. Tether fell as low as 95 cents before recovering. (Tether is backed by cash and other traditional assets.)

The volatility quickly caught the eye in Washington, where stablecoins have been on regulators’ radar. Last fall, the Treasury Department released a report calling on Congress to craft rules for the stablecoin ecosystem.

“We really need a regulatory framework,” Treasury Secretary Janet Yellen said during a congressional hearing on Thursday. “Over the past two days, we’ve had a real demonstration of the risks.”

Stablecoins “present the same kinds of risks that we have known for centuries when it comes to bank runs,” she added.

Other parts of the crypto ecosystem deteriorated at the same time. On Tuesday, Coinbase, one of the largest cryptocurrency exchanges, reported a quarterly loss of $430 million and said it lost more than 2 million active users. The company’s share price has fallen 82% since its triumphant market debut in April 2021.

Brian Armstrong, CEO of Coinbase, tried to reassure customers on Twitter that the company was not at risk of bankruptcy after a required legal disclosure about the ownership of its assets sparked panic.

Cryptocurrency prices also fell precipitously. The price of bitcoin fell to $26,000 on Thursday, down 60% from its peak in November, before recovering somewhat. Year-to-date, bitcoin’s price movement has closely mirrored that of the Nasdaq, a benchmark heavily weighted toward tech stocks, suggesting investors are treating it like any other risky asset.

The price of ether also plunged, losing more than 30% of its value over the past week. Other cryptocurrencies, like solana and cardano, are also down.

Any panic could be overdone, some analysts said. A study by Mizuho showed that the average bitcoin owner on Coinbase would not lose money until the price of the digital currency fell below $21,000. This, according to Dolev, is where a real death spiral could occur.

“Bitcoin worked as long as nobody lost money,” he said. “Once it gets back to those levels, it’s kind of an ‘Oh, my God’ moment.”

Professional investors who weathered the volatility in crypto also remained calm. Hunter Horsley, CEO of Bitwise Asset Management, which provides crypto investment services to 1,000 financial advisers, met with more than 70 of them this week to discuss the market. Many weren’t selling, he said, because all other assets were down as well. Some were even trying to capitalize on the decline.

“Their point of view is, ‘It’s not fun, but there’s nowhere to hide,'” he said.

Still, the price crash has rattled crypto traders. Just a few months ago, blockchain proponents predicted that the price of bitcoin could hit $100,000 this year.

“I never thought things would go downhill so quickly,” said Ed Moya, crypto analyst at trading firm Oanda.

This article originally appeared in The New York Times.



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