Hi, this is Hot Mic and I’m Nidhi Razdan.
It was touted as the next big thing of the future. In the last few years, the cryptocurrency market has boomed in several countries. And those who took a chance and invested in it have made millions. But this May, there was a spectacular crash in the cryptocurrency sector, with many people losing their entire savings.
A massive sell-off in cryptocurrencies wiped out over $200 billion of wealth from the market in just a span of 24 hours. The crypto market has witnessed volatility before, but this time experts are worried it may never go back to being the same again.
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone, anywhere to send and receive payments. So instead of physical money exchanged, it’s done online.
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders. There are thousands of cryptocurrencies out there. Some of the best known ones include Bitcoin, which was the first cryptocurrency and still is the most commonly traded one.
Then there is Ethereum developed in 2015. This is a blockchain platform with its own cryptocurrency called Ether or Ethereum. It is the most popular cryptocurrency after Bitcoin.
And then there’s Litecoin, which is a currency most similar to Bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
Now, after riding a wave that has helped many earn millions, the crypto market is seeing a crash for the last few months, with many comparing it to the Lehman Brothers crash of 2008.
Early last month, it was complete carnage on the crypto market, with the top 20 names dropping as much as 35% in 24 hours. Market experts said that rising interest rates inflation worries and the geopolitical crisis with the war in Ukraine are behind the factors that are denting market sentiment for crypto assets as well. The cost of a single Bitcoin has been dropping slowly since the end of March, alongside a broader problem with the technology sector. But early May was the breaking point with a major cryptocurrency project called Terra Luna – that was once valued at more than $50 billion -ending up effectively worthless.
Within the crypto universe, Terra was supposed to be a relatively safer option a stable coin or a cryptocurrency token that has a fixed value of, say, a US dollar.
This gives investors some security in highly volatile markets. The near collapse of these stable coins has prompted regulators and authorities to call for stricter laws in governing these financial assets.
As Terra collapsed, so too, did other cryptocurrencies. Panic then gripped the broader sector, and Bitcoin also tumbled. The crash lasted from early to mid-May, and while some stability has returned, it shows no sign of returning to anywhere near its previous highs.
Today, Bitcoin is off more than 50% from the record high it hit last November, with many other digital tokens sharply lower from their all time highs. One expert says this is the beginning of a crypto winter.
But other experts say this could be the beginning of the end. So let’s get into more detail on why this is happening. Well things are not great for the global economy at the moment. Tech stocks in general have not been doing well in recent months, and high inflation has undercut the appeal of high growth.
As The Guardian newspaper explained, the crypto economy seems also disproportionately driven by retail investors who treat the sector like a halfway house between conventional day trading and straightforward gambling.
As rising costs bite them, those investors may be forced to liquidate some of their holdings, pushing the sector even further into the red. So what does all this mean for the crypto market?
Well, according to one estimate, there are more than 19,000 cryptocurrencies in existence and dozens of blockchain platforms. Several cryptocurrency industry experts believe, that like the dot com bubble that burst, thousands of digital tokens are likely to collapse.
While the number of blockchains in existence will also fall over the coming years.
The trust of investors has been severely dented this time. Many lost almost all of their investments in Terra and Luna. So exchanges, including Indian ones, have de-listed these currencies from their platforms so that new investors don’t end up buying them.
Regulators could sweep-in to tighten norms around investments in stablecoins. In fact, the head of the US Securities and Exchange Commission, who has previously likened stablecoins to poker chips, has renewed calls for regulations around the crypto asset class.
This basically means there may be more caution in the crypto market in the days ahead.
Critics say that the crash could be a wake up call for how risky digital assets are. But there is still a lot of money invested in crypto. Though the rose tinted glasses may just have come off.