Has the crypto bubble burst?

Bitcoin is no longer booming. In recent years, it seemed that the value of the world’s leading cryptocurrency could only go up, with the value of a single Bitcoin reaching a peak of $68,000 in November 2021. However, recent headwinds in the global economy and a series of scandals have brought that valuation down to around $20,000 this month, along with confidence in the broader crypto ecosystem. As speculation grows about the long-term future of Bitcoin and its rivals, Tech Monitor asks if the crypto bubble has burst – and what’s next for this once-promising sector.

What Caused Crypto Crash?

One reason why the value of Bitcoin and other cryptocurrencies have fallen in recent months is because of the current volatility in the global economy. Central banks around the world have raised interest rates sharply in recent months to curb rising inflation, itself a result of higher energy prices and post-Covid volatility in supply chains. As money became more expensive to borrow, both VC firms and retail investors gradually began to lose confidence in crypto prospects, choking off the flow of cash from the mainstream economy into the sector.

This in turn helped trigger a drop in the value of Bitcoin, its competitors and a number of crypto businesses. The situation was exacerbated by sector-specific scandals, not least the fall of TerraUSD (UST.) A type of stablecoin pegged to the US dollar, the value of the cryptocurrency collapsed in May after the founders of UST were forced to sell 80,000 Bitcoins worth $3 billion to raise the value of the coin. The sale had the opposite intended effect, weakening confidence in UST and sparking a run on Bitcoin itself.

What followed was a crisis of confidence in the sector in general. “The collapse of TerraUSD has started what we used to call the ‘panic,’ when major financial institutions sold large chunks of assets and everyone else tried to get their money out as fast as they could,” said economist Frances Coppola, in an interview with BBC news.

What effects will cryptocrash have?

In the short term, the crash in the value of Bitcoin and other cryptocurrencies has wiped out millions of investor portfolios — nearly $2 billion, according to one estimate. While the bulk of these losses have been borne by hedge funds and other corporate market players, many individual retail investors have lost thousands of dollars, in some cases wiping out their savings.

For many critics of the crypto sector, the crash also underscores the lack of accountability among many cryptocurrencies and their associated operations. Having long suffered from a reputation for being home to fraud and shaky business practices, the addition of further volatility has had a chilling effect on the engagement of VC firms and other institutional investors in the sector. Many have now shied away from investing in crypto companies that market themselves as part of a broader, long-term trend toward decentralization in society toward prospects in automation and transportation that have a more logical and shorter path to profitability.

Content from our partners

Yet economists and bankers do not seem particularly worried about a whiplash effect from the crash on the wider global economy. The relatively few links between the sector and the banking system mean that a decline in the former will probably not have many ripple effects on the latter.

Will crypto recover?

Due to the ongoing bear market position, it is difficult to make predictions about the overall impact this crash will have on the long-term future of cryptocurrencies. However, the NFT market crash and recent rumors that cryptocurrency exchange Coinbase is close to bankruptcy have had a negative impact on the crypto market, preventing it from exiting its bearish mode.

In late July, there were some glimmers of hope in the crypto world. While Bitcoin’s price has been on a downward spiral since the beginning of August, other cryptocurrencies appear to be breaking free from the grip that the first of their numbers has had on the sector’s fortunes. Ethereum, for example, has seen its value rise significantly in recent weeks, largely due to excitement surrounding its long-awaited transition to a more environmentally friendly proof-of-stake operating model.

Some analysts are even hopeful that the current ‘crypto winter’ will freeze out those investors who were only interested in the market for short-term gains and leave room for visionaries in the field to flourish. Edith Yeung, a partner at Race Capital, said recently CNBC that she believes the long-term health of the crypto space is inextricably linked to an inevitable evolution of the internet into a ‘Web 3.0’ model.

“I think it’s a whole generation of the internet [users who] really believe that “you can’t make money off my data anymore … the internet should be owned by us,” Yeung said. “That’s why there’s such a push with crypto because the ownership of Ethereum or Solana is really the user who owns that piece of token — which is just part of that internet.”