The lightning uptake of crypto assets has swelled a volatile sector – but this week investors saw the market “careering down a cliff edge”. Here’s why.
The lightning uptake of crypto assets like bitcoin has swelled a volatile sector to a valuation of roughly two trillion dollars recently.
A week-long rout has wiped away tens of billions of dollars from that value and spread panic throughout the market.
Bitcoin is the premier cryptocurrency and its value accounts for the lion’s share of the whole sector.
This week, its price at one stage plummeted to $US25,500 – less than half of its record price in November last year and the lowest valuation since it exploded at the end of 2020.
“Fears about rampant inflation and the abrupt ending of the era of cheap money have sent cryptocurrencies careering down a cliff edge,” said Hargreaves Lansdown’s Susannah Streeter, referring to the new monetary tightening policies of the US Federal Reserve and other central banks.
She said the new environment had prompted investors to “scuttle away from risky assets”.
Bitcoin began to slide at the same time as stocks in technology companies, but the collapse has been more marked in the volatile crypto sector.
Many other coins also lost value, including the second most importer, ether, which plummeted by a third in the course of the week.
Not so stablecoins
As the biggest cryptocurrencies are famously volatile, entrepreneurs invented a theoretically more reliable alternative known as stablecoins.
These coins, making up a market worth around $US180 billion according to a March estimate from the US Fed, are pegged to the US dollar or other fiat currencies.
But this week one of the biggest, terra, spectacularly lost its dollar peg and plunged to just 10 cents at one stage on Friday.
Terra is one of several such coins to rely on a complex mechanism of trades in other cryptocurrencies to support its peg, rather than being backed by funds in fiat currencies.
Analysts including JP Morgan warned that terra’s death spiral raised wider questions about the viability of stablecoins based on algorithms.
The “potential collapse” had also “soured sentiment among crypto investors” more broadly, the US bank said in a note to clients.
PayPal’s decision to accept bitcoin in late 2020 helped kick off a precipitous rise in the value of crypto assets, driven partly by a sense that the digital tokens could potentially function like currencies…