Sure, Crypto crashes, but that’s okay

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“Grab your conviction and stay with him.” That advice distributed on Tuesday The hosts of the popular crypto podcast Bankless, Ryan Sean Adams and David Hoffman, embody the mindset that is prevalent in crypto circles these days.

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Cryptocurrency is in a bad place. Over the past seven days, the price of Bitcoin has fallen by more than 29 percent, while Ethereum has fallen by 38 percent, and, in fact, all other cryptocurrencies have followed suit. According to cryptocurrency data provider Coinmarketcap, the cumulative value of the cryptocurrency market has fallen by about 70% since the high of November 2021, when the rise of cryptocurrencies and Web3 seemed insurmountable. Tether stablecoin, a cryptocurrency designed to maintain parity with the US dollar and reputedly backed by dollar reserves (although there are questions about the composition of these reserves) has lost its peg and is trading at 99 cents per unit at the time of writing. Major crypto companies starting with Coinbase exchangeannounced mass layoffs. The latest victim of the crypto crisis is Celsius, a lending platform that according to Kaiko insights has invested $475 million of its clients’ money into stETH, a synthetic asset that could theoretically be exchanged for the leading cryptocurrency, Ethereum, at some point in the future. This follows the collapse of the terra-luna stablecoin last month that rocked the entire industry. The S&P 500 plunged 3.5% on Monday, while the Nasdaq plunged even further, down 4.2%.

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If you are one of 16% of Americans have bought cryptocurrency over the past couple of years, this might seem like the right time to start getting excited. But among the heavyweights of the crypto space, the general reaction to this fall ranges from zen to jaded. BUT meme Bankless’s Twitter page depicts James Franco with a noose on the gallows – a substitute for crypterati who survived Cryptocurrency Crash of 2018asked two weeping crypto holders from 2022 “is it their first time there?” BUT less charitable meme Crypto skeptics shared on Twitter compare overconfident crypto investors to a placid dog sipping coffee in a burning shack. “It’s all right,” the dog says as the flames threaten to engulf him. This too will pass.

“If you look at the fundamentals — blockchain adoption, growing users, discovering real use cases — you don’t think the industry is going down,” says H.E. Justin Sun, Grenadian Ambassador to the World Trade Organization and creator of the TRON blockchain. , whose stablecoin usdd also lost its peg to the dollar last week. “The market is full of FUD [fear uncertainty and doubt] right now, crash [terra-luna] and the recent insolvency issues of some DeFi platforms and funds are not helping either, but I believe in rational expectations and the market is correcting itself. There have always been cycles, and we are on the slippery slope of the current one.”

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Speaking last week, Paolo Ardoino, Tether’s chief technology officer, saw a positive side to the crisis, at least as far as bitcoin is concerned. “Bitcoin may have already proven to be reliable and less volatile than other coins. Bitcoin has fallen 60 percent, but other altcoins have fallen much further. So bitcoin shows much more resilience,” says Ardoino. “We may see a scenario in which bitcoin begins to rise in the coming months, while the rest of the “alternative coins” remain in the red.”

The elephant in the room, however, is that cryptocurrencies — assets typically advertised as a hedge against inflation and the vagaries of the financial system — behave exactly like the rest of the stock market. Ardoino himself drew a parallel between bitcoin’s failures and the recent disastrous performance of Netflix shares, which fell 40% in a single day in April due to disappointing subscriber numbers.

Jamie Burke, CEO of cryptocurrency venture capital firm Outlier Ventures, says cryptocurrencies behave exactly like stocks and that they move in sync because the lines between them are blurring. The dizzying price spikes and frenetic hype around cryptocurrencies has attracted a lot of new money from institutional and retail investors who are spending their stimulus money on the Robinhood stock trading platform. “Digital assets have become linked to the broader macro environment,” says Burke. “A lot of money entered the financial system: they started using it for speculation, and the cryptocurrency definitely benefited from it. But similarly, when the broader macro environment changes, you see it negatively impacting digital assets.”

“​I also think that crypto could have more extreme highs on good news and extreme lows on bad news. So, for example, if Russia declared peace, I think that the cryptocurrency will rise. Why? It doesn’t really make any sense, but it probably would,” he says.

On the other hand, cryptocurrency has never been a hedge against inflation or anything else, for that matter. Instead, it was always meant to be just another part of the wider financial ecosystem. Sam Doktor, director of strategy at consultancy BitOoda, says cryptocurrency is now being used as one of many possible “risk” assets. People who are looking for a place to put their capital and may have already invested in high-risk tech stocks will naturally move up the ladder to bitcoin and then to more obscure crypto assets. “With interest rates close to zero, the market basically said, ‘Let’s take a chance, it’s all right,'” Doctor says. He argues that now that rates are rising and inflation is biting, crypto is the first thing thrown out of the portfolio. “This is the only time we really look at bitcoin and wonder if this is really an inflation hedge. And the answer the markets are telling us is: no.”

But one can only blame general macroeconomic conditions and stock market turmoil for having influenced the downtrend of cryptocurrencies. Some of the pain is undoubtedly self-inflicted. Look at terra moon meltdowna so-called “algorithmic stablecoin” project, also allegedly pegged to the dollar, that lost nearly 99% of its value in May, wasting $42 billion of investor money in the process, according to forensic company Elliptic. Terra’s dollar parity was based on economic stimulus and code, not cash. This mechanism, as economists have pointed out, could not work if it were not for the ever-increasing demand for the asset; when people started cashing out in droves, the currency collapsed. (Terra creator Do Kwon did not respond to several interview requests.) Celsius, who has invested heavily in Terra, is now dealing with liquidity issues and suspended all withdrawals over the weekend. (Celsius executives did not respond to emails, texts, or voice messages.) In other words, in the last couple of years, as the market that goes for everything, bathed in money, was looking for new places to invest their money, schemes that had little effect. the economic fundamentals continued to attract capital—until the situation changed.

But it would be unfair to place the blame for the downturn solely on the teams behind terra-luna and Celsius for something that is a broader industry problem. In the absence of heavy regulation, several major crypto players have gone along with businesses that even seemingly traded in questionable products. Jeremy Aller, founder of Circle, a stablecoin company licensed to transfer money in 46 U.S. states, who usually positions himself as the adult in the room, is caustic. “For example, what is the responsibility of exchanges? Their philosophy is: if the customers want it, they will wear it,” he says. “This is wrong – they are responsible for what they put on their shelves. Do you put infant formula next to rat poison on the same shelf?”

Changpeng “CZ” Zhao, CEO of the world’s first exchange, Binance, disagrees. “Should we list everything? I don’t know, he tells me a week after the terra moon disaster. “I mean, Netflix fell on the NASDAQ. Shouldn’t we have a stock exchange?” He says he hasn’t seen any “deliberate fraudulent behavior” on the part of the terra-luna team, and still believes in the potential of algorithmic stablecoins. Binance invested $3 million in the terra-luna project in 2018.

“Let’s look further. None of the currencies we use today have lasted longer than 300 years,” says Ch.Z. (Terra-moon lasted about three years.)

It is hoped in many circles that the current market collapse will teach people valuable lessons about who can and cannot be trusted. In addition, it is hoped that this may clear the industry of weaker and foamier projects. An often-repeated analogy is to what happened when the dot-com bubble burst: legions of rickety startups went out of business, leaving Amazon and eBay behind. “These falling markets are good for crypto because they are humiliating,” says Kristin Smith, executive director of cryptocurrency lobbying group The Blockchain Association. “It will ultimately make everyone better and stronger.” In addition, she said regulators are paying attention and will now act faster as they have clear examples of what can go wrong.

This does not necessarily mean that we have last heard of cuckoo crypto finance. “People are stupid,” says Ardoino. “They will make the same mistakes again. This is happening in the traditional financial industry: people go long and short in futures all the time, everywhere, not just in cryptocurrencies. You never know what you can teach people.”

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