What you should know as cryptos like Bitcoin and stablecoins plummet : NPR
A Bitcoin logo is seen during the Bitcoin 2022 conference at the Miami Beach Convention Center in Miami on April 8. Crypto like Bitcoin has fallen in recent days as part of a storm hitting all kinds of markets.
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A Bitcoin logo is seen during the Bitcoin 2022 conference at the Miami Beach Convention Center in Miami on April 8. Crypto like Bitcoin has fallen in recent days as part of a storm hitting all kinds of markets.
Marco Bello/Getty Images
As the old maxim goes, sometimes the bigger they are, the harder they fall.
Bitcoin and other cryptocurrencies surged during the pandemic, turning many amateur investors into millionaires, at least on paper. Bitcoin, for example, hit an all-time high of nearly $68,000 in November.
Today it is trading for less than half that amount as part of an intense selloff that has accelerated in recent weeks.
It has been even worse for an area of cryptocurrencies called stablecoins, especially one called TerraUSD which has fallen hard.
Here’s a look at what’s going on.
So why are cryptocurrencies down so much?
Simply put, cryptocurrencies were caught up in the maelstrom affecting broader markets.
Stocks, bonds and other assets have fallen in recent weeks as investors fear the Federal Reserve will need to raise interest rates aggressively to fight inflation, raising the prospect of a recession.
The falls in broader markets have affected cryptocurrencies, with Bitcoin down more than 20% in the past two weeks.
Sales have been worse for some of the newer cryptocurrencies such as Dogecoin, which started as a joke and then took off, thanks in part to the backing of billionaire Elon Musk.
That’s a stark reversal from a few months ago, when actors like Matt Damon and Larry David pitched crypto companies in Super Bowl commercials.
Actor Matt Damon speaks onstage during Focus Features’ “Stillwater” panel at the Deadline Contenders Film: New York event in New York City on Dec. 4. Damon has appeared in commercials for a company called Crypto.com.
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Actor Matt Damon speaks onstage during Focus Features’ “Stillwater” panel at the Deadline Contenders Film: New York event in New York City on Dec. 4. Damon has appeared in commercials for a company called Crypto.com.
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Wasn’t Bitcoin supposed to be a hedge against inflation?
Yes, but it hasn’t turned out to be one, at least so far.
Bitcoin was the first cryptocurrency and remains the most popular of them all.
Supporters of Bitcoin had long touted the digital currency as an inflation hedge, in part because there is a finite supply of it.
But Bitcoin has fallen hard along with stocks.
If Bitcoin was seen as a true hedge against inflation, it should be headed for a multi-decade high.
“A lot of people thought it would be an inflation hedge, but there’s very little data to prove that,” said Randy Frederick, CEO of Charles Schwab who covers cryptocurrencies. “Lately it hasn’t moved up as the market has moved down. Had it been an inflation hedge, it might have.”
In fact, Bitcoin reacts just like any other riskier asset such as stocks.
Still, the argument about Bitcoin as an inflation hedge isn’t completely dead either, experts say.
Bitcoin may be the oldest of the cryptocurrencies, but it has only been around for a little over a decade.
This means that analysts do not have much historical data. Frederick says, for example, that we will know a lot more about how Bitcoin behaves through multiple market cycles.
A sign reading “Bitcoin is going to the moon” is seen during the Bitcoin 2022 conference at the Miami Beach Convention Center in Miami on April 8. The term has become popular among some Bitcoin enthusiasts.
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A sign reading “Bitcoin is going to the moon” is seen during the Bitcoin 2022 conference at the Miami Beach Convention Center in Miami on April 8. The term has become popular among some Bitcoin enthusiasts.
Marco Bello/Getty Images
What about stablecoins?
Cryptocurrencies have spawned offshoots and led to more sophisticated – or as some regulators see them, dangerous – assets.
Stablecoins such as tether or USD Coin are a cryptotype that is gaining in popularity.
Most stablecoins are meant to be backed by real assets. This means that for every dollar worth of a stablecoin, the exchange or seller must set aside an equivalent in a real fiat currency, such as dollars, or an equivalent amount in an easily tradable security, such as government bonds.
That is what should make them more “stable”. If the buyer of the stablecoin wanted to withdraw money from the virtual currency, it should be easy since the exchange should have the money on hand, in the same way that bank customers expect to be able to withdraw their money at any time.
But regulators have long questioned whether exchanges really keep the hard assets aside in an account. Moreover, stablecoins have created their own offshoots.
One of them, TerraUSD, has gotten into big trouble in recent days. TerraUSD is known as an algorithmic stablecoin because it relies on financial development to maintain the 1-to-1 peg between the stablecoin and the backup assets.
TerraUSD is even linked to another cryptocurrency called Luna.
The stablecoin cratered to 14 cents as of Friday, well below the $1 it theoretically should fetch.
Pat Tschosik, a senior portfolio strategist at Ned Davis Research, says TerraUSD’s problems could be part of a potential cryptocurrency recovery.
“It’s still very young,” he says of crypto. “You know, this is still an evolving area. There’s going to be speculation. There’s going to be booms along the way, and all of this is still new.”
Traders work on the floor of the New York Stock Exchange (NYSE) on May 12, 2022 in New York City. Stocks and other markets have fallen in recent weeks due to economic fears.
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Traders work on the floor of the New York Stock Exchange (NYSE) on May 12, 2022 in New York City. Stocks and other markets have fallen in recent weeks due to economic fears.
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So where do we go from here?
More broadly, the outlook for cryptocurrencies is likely to continue to be tied to broader market sentiment.
But the falls in cryptocurrencies and the collapsing value of TerraUSD will alarm policymakers such as Treasury Secretary Janet Yellen and Securities and Exchange Commission Chairman Gary Gensler.
That could lead to more regulation of cryptocurrencies in general.
Continued falls in cryptocurrencies could also raise doubts about the future of the virtual money more broadly, just when there had been signs that it was trying to mature, with more and more professional investors starting to trade it.
Last month, Fidelity, the largest provider of retirement plans, announced it would allow employers to offer Bitcoin in 401(k) plans, even though the Department of Labor has warned employers against doing so.
Nevertheless, cryptocurrencies also have many fanatical followers who are used to steep sales and reversals, and many of them believe that this is a short-term decline.
Tschosik of Ned Davis Research, for example, is “long-term bullish on Bitcoin,” he says. “We’re still seeing the acceptance of that continue to expand.”
He points to millennials, for example, who want to invest in cryptocurrencies because they seem like a “legitimate option.”
However, not everyone agrees, making the future of cryptocurrency uncertain.
