In the crypto market, it’s deja vu all over again.
Cryptocurrency prices are falling; investors panic; the collapse stops and prices stabilize; they try to bounce back but the bounce doesn’t really last.
This sequence has been repeated several times but this time is different in one key regard: The price drop is much sharper and starker. Bitcoin is now trading at its lowest levels since 2020.
The king of cryptocurrencies has erased all the gains it made in 2021. It is now trading around $23,166, according to data firm CoinGecko, a bit more than a third of its record $69,044.77, set Nov. 10.
This rout has also taken in the other alt coins — basically any cryptocurrency that isn’t bitcoin. Ether, a native token of the Ethereum platform, has seen its price drop 75% from its Nov. 10 high of $4,878.26.
(Ether enthusiasts will tell you that this coin has a bright future because the Ethereum ecosystem enables people to develop apps for different uses.)
And then there’s this number, which is quite chilling: The crypto market on June 13 fell below $1 trillion. It has lost more than $2 trillion since hitting just over $3 trillion in November.
What’s Going On?
You’ve probably heard it before: The crash stems from investors’ concern about the economy’s health. They fear that the Federal Reserve’s interest-rate hikes, designed to fight inflation, will damp the economy and, particularly, consumption. If consumers aren’t spending, businesses struggle to sell their products and services and won’t continue to invest.
The second point, which is linked to the first, is that when everyone is in doubt, it’s the risk assets that pay the price. This is the case with tech and crypto, which largely sell promises and invite investors to buy them. So it’s no surprise that we’ve been watching tech stocks and cryptocurrency prices move in tandem for some time now.
The third point is that the crypto industry has been badly hurt by its own demons: scandals. These scandals have rekindled mistrust of this industry. In one month we have seen two big and resounding scandals.
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The most recent one regards the decentralized finance, or DeFi, firm Celsius Network.
Celsius has decided to indefinitely suspend withdrawals of funds, as well as other financial transactions, on its platform. To understand the impact of this decision, consider that Celsius’s business model is to have investors — both retail and professional — transfer their bitcoin and other crypto funds to its platform.
Celsius enables lenders to connect directly with borrowers. Transactions can be completed only if both parties have funds converted into cryptocurrencies on the platform. By suspending withdrawals, for example, Celsius sends the message that no one can access their funds.
Investors are speculating about the platform’s future. Celsius did not respond to a query from TheStreet.
The other scandal took place in May. It involved sister tokens UST and Luna, which crashed because millions of investors all wanted to redeem their tokens at the same time. The debacle of UST and Luna, sister tokens belonging to the Terra ecosystem, caused more than $55 billion in losses for investors.
What to Do Now? Stay or Go.
Many economists say that we are heading toward a recession. Economist Peter Schiff, one of the strongest critics of bitcoin and cryptocurrencies, says we are witnessing a return to Earth.
“It looks like #Bitcoin is going to the moon after all,” Schiff said on Twitter. “The problem for #HODLers is that it started its journey on Pluto. After it shoots past the moon, it’s headed straight for Earth. Just don’t look for a soft landing!”
HODL stands for “hold on for dear life” and it’s a popular term among crypto enthusiasts. It’s similar to the investment strategy of buy and hold.
And indeed investors also hear from evangelists like the billionaire Michael Saylor, who heads MicroStrategy. The company holds 129,218 bitcoins, 4,827 of which were purchased in the first quarter at an average price of $44,645. And he’s undeterred.
Ultimately, every investor will need to decide whether to stay or go. But with everything else people have heard about crypto, they’ve also heard remarks like this one, many times over:
“It is very important to recognize that crypto volatility is the rule – not the exception. Crypto is a young market and therefore unstable by nature,” warned Anna Becker, co-founder and CEO of AI trading platform EndoTech.