Cryptocurrency slump tests durability of hype-driven industry

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Amid the plunge in the price of many cryptocurrencies this week, fans of the Washington Nationals may have spotted a bizarre tweet from the baseball team’s account. “Encryption 101”, it read, featuring action clips and voiceovers from the Nats star as an embedded video, introduces the basic concepts of digital currency. “You have a question. We already have the answer.”

Terra, the crypto company that sponsored the tweet, could have started by answering some questions about itself.

The company signed a five-year, $40 million promotional deal with the Washington baseball team earlier this year, which includes launching its cryptocurrency as a payment method at ballparks as early as next year. However, the digital coin, a cryptocurrency known as a stablecoin, has been in free fall this week as it aims to hold a price of $1. TerraUSD, or UST as it is known, traded as low as 30 cents on Wednesday morning before recovering to 80 cents on Wednesday evening.

It’s not clear what’s throwing UST into the mess. But the plunge in what was once the third-largest stablecoin by total market capitalization points to a broader assessment of the hype-fueled asset class, which has contracted as much this year as it swelled in 2021. big.

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

Overall, interest in crypto trading appears to be cooling. Coinbase, the largest U.S. crypto exchange, posted a first-quarter loss of $430 million on Tuesday as its stock continued to slide, down 79 percent this year. The exchange reported that its monthly active users fell to 9.2 million in the first quarter of this year from 11.4 million in the previous quarter.

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Bitcoin, the world’s most popular cryptocurrency, fell below $30,000 on Wednesday, down more than 56 percent since hitting an all-time high in November. It is now trading near 2021 lows, meaning most investors who bought it as interest in cryptocurrencies surged last year are now at a loss on their investments. In total, an estimated 40% of Bitcoin holders are underwater on the asset, according to a new analysis by crypto analytics firm Glassnode.

Ethereum, which is also widely held, has more than tripled since December 2020, but is down 54% from its all-time high six months ago. However, the value of the most popular stablecoin, Tether, did not fall below $1. It doesn’t use algorithms like UST; the latter is an unorthodox approach that basically relies on transactions rather than assets to back it up, which is probably why it plummeted.

The plunge in cryptocurrency prices has tracked a broader move by investors to dump risky assets such as tech stocks as the Federal Reserve raises interest rates to fight inflation. The tech-heavy Nasdaq has fallen 10% since Thursday. Giants like Netflix and Meta are among the hardest-hit companies in 2022 — Netflix is ​​down 75% over the past six months, while Meta is down 45% over the period.

But the downturn in the crypto market is particularly stinging for the nascent industry. It coincides with the type of institutional adoption that industry leaders are seeing the technology gain, and they hope to push it irreversibly into the financial mainstream.

For example, institutional players have outpaced retail investors on Coinbase. Couple traders accounted for a third of the platform’s trading volume last year, down from 80% in 2018, according to new research from Morgan Stanley. Wall Street firms continue to dabble in the space. Goldman Sachs executed its first over-the-counter bitcoin options trade in March; BlackRock announced last month that it would invest in stablecoin firm Circle Internet Financial.

Tyler Gellasch, founder of the nonprofit Healthy Markets Association, said traditional financial institutions have missed too many years of the booming value of cryptocurrencies and cannot now dissuade them from exiting the cryptocurrency market. “Fears of fraud, volatility and regulatory uncertainty have kept many traditional financial firms on the sidelines of the digital asset boom,” he said. “Many traditional financiers have only recently committed themselves to the digital asset market after missing out on profits for a few years. I would be surprised if they turned around immediately now. They put so many resources into figuring out how to offer their clients some thing.”

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Crypto’s challenges could also taint some entities allied with them. For example, the NBA is making big bets on this, with the Warriors, Mavericks, and Heat all making high-profile deals with crypto companies — a potential optical issue, as all three teams this week in the playoffs. Spectre of companies like Coinbase (the league’s official crypto platform partner) and FTX (which has an arena branding deal with the Warriors and Heat) push their services in an industry crater, for a company that likes to position itself as more of a company than its peers. Younger and smarter.

Volatility is nothing new in the crypto space, some academic experts said, and cautioned against interpreting the underlying implications as this week’s crash or the larger drop over the past six months.

“We’ve seen his films before,” said David Yemark, a professor of finance and business transformation at New York University’s Stern School of Business who closely studies crypto and the economy. “There was a big dip in 2014, and then there was a ‘crypto winter’ in 2018, with lots of hiccups in between. It was just very volatile. We might see this again — in both directions.”

He said he did not expect contagion to the larger economy or other investments. “The total market cap of the crypto economy is $1.3 trillion, which is much smaller than the market cap of people investing in stocks and real estate,” Yemark said. “It’s mostly speculation of young people taking small opportunities on big paydays.”

However, those people felt the pain, especially from Luna.This week’s Reddit forum dedicated to the currency features dark stories People who say they lose money on Terra currency.

“$15,000 lost,” wrote a user named No-Forever2056. “I became greedy and wanted more money so I could at least put down a down payment for my family. I don’t think there was a house or savings at the time.”

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Another user with the username CryptographerTop8162 wrote: “My friend and ex-colleague (my manager of 15 years) tried to kill himself this morning. He basically moved all of his savings into cryptocurrency in 2021, while LUNA is an important player in his portfolio.”

Other financial giants say they see no reason why it shouldn’t make it easier for ordinary Americans to invest in cryptocurrencies, despite objections from Washington policymakers. Fidelity Investments said last month that it would 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 Labor Department and two Democratic senators — Elizabeth Warren (Massachusetts) and Tina Smith (Minnesota) — who wrote to the company asking it to address related “fraud, theft, and significant risk of loss”. assets.

Warren said the plunge in cryptocurrency prices this week underscores the dangers retirees face. “We cannot put Americans’ life savings and retirement at risk when unregulated and volatile crypto gambling collapses,” she said in a statement.

But Fidelity showed no signs of backing down. Company spokesman Eric Sandwen said Fidelity is providing “a responsible solution for program sponsors who want to address mainstream interest in cryptocurrencies and provide their employees with access to digital assets.” He said the The company is providing “institutional consumer safeguards,” including investment restrictions and education, and will continue to discuss the matter with policymakers.

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

“As we’ve seen, the trend in investor sentiment can shift quickly,” Hume said. Investors lack the protection offered by more regulated investment vehicles. “There is currently no way to prevent insider trading in cryptocurrencies. Investors may be trading behind the flow of market information, which is a significant risk.”

Some say that taking a long-term view rewards those with a greater appetite for risk. Professional crypto investors point out that the industry has experienced crashes before, and continued sell-offs are inevitable. “Prices had to come back down to reality, and it happened,” said Abraham Chaibi, co-founder of cryptocurrency trading firm Dexterity Capital. “It’s not an existential crisis for cryptocurrencies, by any means.”

Jeremy Epstein, DC chief marketing officer at decentralized finance firm Radixit, who also runs two crypto investment funds, said he thinks observers should keep in mind the longer history of technology.

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“If you look back at the dot-com era, Webvan and Pets dot com also collapsed and disappeared quickly,” he said. “But that doesn’t mean we don’t want to buy groceries or pet supplies online. It’s just the wrong implementation at the wrong time.”

The cryptocurrency crash has not sparked new impetus for clearer federal rules for assets. But the implosion of the UST has attracted widespread attention. The coin relies on complex financial engineering to maintain a stable price, and crypto detectives are still debating a series of events that began over the weekend, when UST first fell to 99 cents. The company did not respond to a request for comment.

Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee on Tuesday that its fate underscored the threat unregulated stablecoins could pose to the entire financial system. “It just goes to show that this is a fast-growing product,” she said, hours before the Nats posted their Terra-sponsored tweet. “There are risks to financial stability and we need a proper framework.”

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