Why cryptocurrencies have gone from hot to full meltdown: NPR
A Bitcoin ATM was spotted at a subway station in Brooklyn Heights, New York City on June 13. Bitcoin and other cryptocurrencies have plummeted in recent days.
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A Bitcoin ATM was spotted at a subway station in Brooklyn Heights, New York City on June 13. Bitcoin and other cryptocurrencies have plummeted in recent days.
Michael M. Santiago / Getty Images
The cryptocurrency world is in chaos.
Just months ago, crypto companies announced a lot during the Super Bowl after virtual currencies had a staggering rally in 2021.
Today, Bitcoin and other cryptocurrencies are plummeting, and companies such as Coinbase, which operates the largest cryptocurrency exchange in the United States, are announcing layoffs.
“The crypto house is on fire, and everyone is just rushing to the exits because there is a complete loss of confidence in the room,” said Ed Moya, a senior marketing strategist at Oanda.
Here’s what’s going on.
Why is crypto falling so sharply?
Because they are affected by the same factors that affect stocks and other assets.
Consumer prices are rising at the fastest annual rate in over four decades, and the Federal Reserve is raising interest rates aggressively to bring down inflation.
On Thursday, the Fed raised interest rates by three quarters of a percentage point, indicating that it could raise them again by the same amount at its next meeting in July if necessary to cool prices.
Higher interest rates make borrowing costs more expensive for people and companies, and this raises concerns about an economic recession.
Shares have fallen dramatically from records set in January, with the broad S&P 500 index heading into a bear market this week (when an index falls 20% or more from its recent high).
Cryptocurrencies have hardly been immune. Since Bitcoin reached a record high in November, the value of the world’s most popular digital currency has fallen by around 70%, and rivals are also suffering. Ether is down by around 70% this year, and so is Dogecoin.
Bitcoin’s supporters have always claimed that the digital currency would be an “inflation hedge”, but in fact it has not behaved that way.
As shares in technology companies have fallen, so has the value of Bitcoin.
“What this episode, this crack in cryptocurrencies, shows is that cryptocurrencies are largely speculative financial assets that are subject to macroeconomic forces, such as changes in interest rates,” said Eswar Prasad, an economics professor at Cornell University.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Thursday. Fears of the Fed’s aggressive actions against inflation have raised concerns about the impact on the economy.
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Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Thursday. Fears of the Fed’s aggressive actions against inflation have raised concerns about the impact on the economy.
Spencer Platt / Getty Images
So what does this mean for cryptocurrency companies?
The sharp fall in cryptocurrencies is driving some companies into trouble.
Celsius, which takes cryptocurrency deposits from individuals and lends them out, stopped withdrawals because it faces financial problems. Binance, a cryptocurrency exchange, stopped withdrawing Bitcoin for several hours on Monday.
The problems at Celsius undermine confidence in the broader cryptocurrency area just weeks after the collapse of a stack coin called TerraUSD.
Cryptocompanies respond by re-evaluating their plans for the future.
Coinbase, a cryptocurrency exchange platform, reduced its staff by almost one-fifth.
In a note to employees, the company’s CEO said Coinbase “has grown too fast.”
“We seem to be entering a recession,” Brian Armstrong wrote.
Some supporters of cryptocurrencies still believe that a “cryptocurrency winter” could lead to a “cryptocurrency.” In the past, deep downturns have led to strong upswings.
But according to Moya, the analyst at Oanda, the economic landscape is different now, and so are the prospects for crypto.
In fact, with the Fed continuing to raise interest rates aggressively and with continued high inflation, there will likely be more pain ahead of all markets, including cryptocurrencies.
Fed Chairman Jerome Powell speaks during a press conference at the Federal Reserve Building in Washington, DC, on Wednesday. The central bank raised interest rates by three quarters of a percentage point, the largest increase since 1994.
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Fed Chairman Jerome Powell speaks during a press conference at the Federal Reserve Building in Washington, DC, on Wednesday. The central bank raised interest rates by three quarters of a percentage point, the largest increase since 1994.
Olivier Douliery / AFP via Getty Images
What dose does this mean for those who came in on crypto?
It has been a cheeky awakening for millions of people who bought cryptocurrencies, especially if they got into mania last year.
Prasad says 2021 was “the height of cryptocurrency.”
The total value of all digital currencies in the world swelled up to 3 trillion dollars. Cryptocompanies entered into sponsorship agreements with professional sports teams, and Coinbase, Crypto.com, eToro and FTX paid out millions of dollars to buy ads during the Super Bowl.
Crypto.com hired actor Matt Damon as a spokesman, and an FTX ad featured the only comedian Larry David.
The message from these companies was that crypto represents the future of finance, and it was best not to miss it.
“The technological dazzling cryptocurrency swept in many retail investors who were unaware of the kind of risk they were taking,” Prasad said.
Today, the total value of the crypto market has been shaved to around $ 1 trillion. And if you bought Bitcoin on February 14, the day after the Super Bowl ad, it’s now worth about half of what you paid for it.
The exterior of the Crypto.com Arena was seen in Los Angeles on January 26th. Many cryptocurrency companies hired celebrities to present their products and signed sponsorship agreements.
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The exterior of the Crypto.com Arena was seen in Los Angeles on January 26th. Many cryptocurrency companies hired celebrities to present their products and signed sponsorship agreements.
Rich Fury / Getty Images
What will this mean for the regulations in the sector?
The increase in amateur investors, combined with the increasing complexity of some of the cryptocurrency products, worries regulators.
Crypto markets are still fairly new, and there is a lack of clarity about even the most basic things, such as who is responsible for monitoring the space.
Right now, both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) require supervision of parts of the crypto market.
“If there is no guidance at all, people will be exploited, and we want to prevent that,” said Cam Harvey, a professor of finance at Duke University. – Right now we basically have nothing.
The SEC is stepping up enforcement actions against crypto companies and considering new rules. Meanwhile, in an executive order, President Biden asked government agencies to make political recommendations.
And in Congress, Senator Cynthia Lummis (R-WY) has teamed up with Senator Kirsten Gillibrand (D-NY) on the first comprehensive crypto legislation. The bill will give more regulatory authority to the Commodity Futures Trading Commission.
Nevertheless, for the time being, many analysts do not believe that the broader financial system is in jeopardy. The total value of the cryptocurrency market is still less than the total market value of a large company like Apple.
But this recent downturn has raised some serious concerns.
