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Jim Skelton
Jim Skelton

Has The Cryptocurrency Market Really Collapsed ... BETTER

The comments from the industry come as the cryptocurrency market continues to feel pressure. Bitcoin is off more than 50% from its record high it hit in November, with many other digital tokens sharply lower from their all-time highs.

Has the cryptocurrency market really collapsed ...

Stablecoins are integral parts of "DeFi," or decentralized finance, designed to be ways for investors to hedge against the volatility of the cryptocurrency market. Say ether's price is $2,000 -- a trader could exchange one ether for 2,000 USDC tokens. If tomorrow ether drops 50% to $1,000, those 2,000 USDC tokens would still be worth $2,000 and could be traded for two ether tokens. When investors smell a downswing coming, they put their money on stablecoins like tether, USDC and, until this week, UST.

Bitcoin and the cryptocurrency market more broadly has been trading in a closely correlated fashion to other risk assets, in particular stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of the year. In the same period, the tech-heavy Nasdaq fell more than 22%.

Last year, a coin called terraUSD collapsed. It was dubbed an algorithmic stablecoin, so called because it maintained its one-to-one peg with the U.S. dollar via an algorithm. It was not backed in full by real assets such as bonds as USDC, BUSD and USDT are. The algorithm failed and terraUSD crashed, sending shock waves across the crypto market.

A cryptocurrency bubble is a phenomenon where the market increasingly considers the going price of cryptocurrency assets to be inflated against their hypothetical value. The history of cryptocurrency has been marked by several speculative bubbles.[1]

Some economists and prominent investors have expressed the view that the entire cryptocurrency market constitutes a speculative bubble. Adherents of this view include Berkshire Hathaway board member Warren Buffett and several laureates of the Nobel Memorial Prize in Economic Sciences, central bankers, and investors.

The 2018 cryptocurrency crash[2][3][4][5][6] (also known as the Bitcoin crash[7] and the Great crypto crash[8]) was the sell-off of most cryptocurrencies starting in January 2018. After an unprecedented boom in 2017, the price of Bitcoin fell by about 65% from 6 January to 6 February 2018. Subsequently, nearly all other cryptocurrencies followed Bitcoin's crash. By September 2018, cryptocurrencies collapsed 80% from their peak in January 2018, making the 2018 cryptocurrency crash worse than the dot-com bubble's 78% collapse.[8] By 26 November, Bitcoin also fell by 80% from its peak, having lost almost one-third of its value in the previous week.[9]

By 19 May, Bitcoin had dropped in value by 30% to $31,000, Ethereum by 40%, and Dogecoin by 45%. Nearly all cryptocurrencies were down by double-digit percentages.[42] Major cryptocurrency exchanges went down amid a market-wide price crash. This was partly in response to Elon Musk's announcement that Tesla would suspend payments using the Bitcoin network due to environmental concerns, along with an announcement from the People's Bank of China reiterating that digital currencies cannot be used for payments.[42]

In May 2022, the stablecoin TerraUSD fell to US$0.10.[90] This was supposed to be pegged to the US dollar via a complex algorithmic relationship with its support coin Luna. The loss of the peg resulted in Luna falling to almost zero, down from its high of $119.51.[91] The collapse wiped out $45 billion of market capitalization in a week.[92] On 25 May, a proposal was approved to reissue a new Luna cryptocurrency and to decouple from and abandon the devalued UST stablecoin.[93][94] The new Luna coin lost value in the opening days of being listed on exchanges.[95]

While freefalling cryptocurrency prices may account for some of the drop off in NFT transaction volume, the decline is too steep to be explained by this alone, according to Chainalysis economist Ethan McMahon. An inflated market was also, to some extent, responsible for the precipitous drop in transaction values.

This has not happened yet in the cryptocurrency economy, and we must ensure that it never does. Any talk of bailouts should be flatly discarded, as such forms of government assistance create what economists call moral hazard: They induce the very risky behavior that the regulation seeks to avoid. In the long term, the only true form of economic justice will come from the free market, where customers can choose between multiple vendors and vote with their feet. The only real way that customers can learn these harsh lessons is through trial by fire, by observing situations like the FTX collapse and exercising more discretion in the future to whom they trust their financial assets. I feel empathy for those unwitting customers who lost their life savings in what is likely a massive fraud architected by Samuel Bankman-Fried and his cronies. There is no joy in witnessing the financial pain of innocents. However, we must take a longer view, and understand that this is a necessary process for the market to self-regulate.

Third, regulators must recognize the power of the market in delivering economic justice and aligning long-term incentives, and adopt the Hippocratic oath to first do no harm when they conceive of their role in future financial markets. Fourth, the world must learn the deep differences between centralized entities and decentralized protocols. Bitcoin is the only true decentralized technology in the cryptocurrency economy. The last decade has seen the establishment of centralized coins and exchanges, with all the governance problems and opacity that centralization entails. The bitcoin community has much work to do to educate the broad public about its principles of individual sovereignty, of incentives over mandates, of decentralized networks over central authority, and of transparency over opacity.

Indeed, the collapse of Terra alone had investors and onlookers wondering whether it was enough to permanently damage the entire cryptocurrency market for good. While the overall cryptocurrency market is now seemingly recovering, UST remains down 88% in the last week and is trading at 9 cents. Luna lost 100% of its value in the same timeframe.

"I think there is more downside in the coming days. I think what we need to see is the open interest collapse a lot more, so the speculators are really out of it, and that's when I think the market will stabilise."

Ether , the second-largest cryptocurrency by market capitalisation, steadied near $2,000 on Friday after a drop as low as $1,700 on Thursday. Bitcoin and ether are about 60per cent below record peaks reached in November.

Amid the cryptocurrency market downturn, exchange platform Coinbase has warned that if it were to go bankrupt, the crypto assets it holds might be considered part of the bankruptcy estate. While CEO Brian Armstrong (pictured) reassured investors that its clients' funds were safe with Coinbase, the stock price has continued to plunge.

Amid the crypto market volatility, Bitcoin fell below US$16,000 for the first time since November 2020. While the cryptocurrency has recovered slightly since then, it still sits well below its high of over US$68,000 reached in November 2021.

The proposed deal between Bankman-Fried and rival Binance Chief Executive Officer Changpeng Zhao of Binance had been the latest emergency rescue in the world of cryptocurrencies this year, as investors pulled out from riskier assets in the wake of rising interest rates. The cryptocurrency market has fallen by about two-thirds from its peak to $1.07 trillion. 041b061a72


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