The world’s second-largest cryptocurrency Ethereum has joined the cryptocurrency’s crash – its value has fallen by 20 percent in the past 24 hours – as the digital currency’s slump hurt investors who bought into the Covid years.
The value of cryptocurrencies has fallen sharply over the past few days as fears spread over the global economy and investors started selling risky assets.
However, traditional equity investors are also hurting, with US tech stocks also falling in recent weeks including Amazon which is down 30 percent in one month.
Many amateur investors took to buying stocks and cryptocurrencies during the Covid pandemic and made money because values were generally rising in the so-called bear market.
Ethereum has now lost more than half its value this year, Bitcoin has shed a third of its value since January and Luna with 98 percent of its value overnight with suicide hotlines installed on the coin’s Reddit page as a result.
Coinbase, the popular cryptocurrency exchange, has warned users to lose all their money if the company goes bankrupt – after the economic downturn sent its stock price down 27 percent.
What are cryptocurrencies?
Cryptocurrency is a digital currency that can be used for online transactions.
It’s the internet’s version of money – unique pieces of digital property that can be transferred from one person to another.
All digital currencies use the “blockchain” and can only be created and shared using specific, agreed-upon rules. The rules are slightly different for each cryptocurrency.
People can buy bitcoins through exchanges such as Coinbase and Bitfinex.
Bitcoin was the first cryptocurrency created in 2009.
Other coins like Litecoin and Dogecoin do the same thing but have slightly different levels of inflation and the rules surrounding transactions.
Currently, about 270,000 transactions are made every 24 hours.
These currencies do not exist as physical or digital objects. It’s just a collective agreement with other people on the network that your coin was legitimately “mined”.
Blockchain is the record of changes in ownership of a currency that is broadcast over the network and held by computers around the world.
The network operates by harnessing the greed of individuals for the greater good.
A network of tech-savvy users called miners maintains the integrity of the system by pouring their computing power into the blockchain, the global operating tally of every Bitcoin transaction.
As long as miners keep the blockchain secure, counterfeiting should not be an issue.
However, as cryptocurrencies allow people to trade money without third party interference, it has become popular with liberals as well as tech-lovers, speculators, and criminals.
During the pandemic, record low interest rates aimed at boosting economies have caused investors to buy riskier assets such as cryptocurrencies at higher rates of return.
As rising inflation causes interest rates to rise in order to protect savings, these assets are sold in favor of safer government bonds – which will provide better returns.
The Bank of England raised interest rates by 0.25 per cent to a 13-year high of 1 per cent on May 5.
The Federal Reserve also raised interest rates to 1 percent on May 4 – with further hikes expected to stave off the worst impact of inflation.
The Nasdaq stock exchange experienced its biggest one-day decline since June 2020 earlier this week, and the crypto hit points to a growing integration between the crypto and traditional markets.
The index, which includes several high-profile technology companies, ended trading on May 5 at $12,317.69 with shopping sites such as Etsy and eBay leading the decline.
The two companies saw their values fall 16.8 percent and 11.7 percent, respectively, after announcing lower-than-expected revenue estimates.
Shares of once-flying tech companies have begun to fall dramatically in value in recent months — raising fears of a broader economic meltdown and making investors less likely to buy the assets.
Elon Musk’s Tesla account fell 36 percent in the past month amid news of the eccentric CEO’s attempts to buy Twitter.
The electric car manufacturer is now trading at £600, a significant drop from £937.69 a month ago.
Delivery giant Amazon has seen a 30 per cent drop in its price since April 11 with the stock hitting £1,725.19 today – down from £2,468.75.
The decline in these stocks is stoking fears that the “dotcom bubble burst” in the early 2000s may be about to repeat.
In the late 1990s, the increase in computer and Internet access led to widespread speculative trade in Internet companies.
This interest has resulted in companies with the ‘.com’ suffix being rated very highly.
After the US Federal Reserve raised interest rates after the end of the boom period in the 1990s, speculative trading declined and caused the internet bubble to burst, sending values down.
The volume of business that cryptocurrency exchanges do, which keep “blockchain” records of transactions, is already dropping dramatically.
Despite expectations, cryptocurrency traders on social media have taken to the platforms to ridicule the crash — and encourage others not to sell.
The acronym “HODL” – Hold On for Dear Life – has been used in many of these memes after gaining popularity in earlier incidents where traders bet their investments on coins leading to a recovery.
The crypto sale was driven by a tough macro backdrop of high inflation and interest rates sending shockwaves through the tech sector, dragging cryptocurrencies down with it, confirming that bitcoin and others serve no purpose as an inflation hedge, Victoria said. Scholar, Head of Investments at Interactive Investors.
Cryptocurrency Luna lost its peg to the dollar this week, dropping below $1 per coin, causing prices to drop dramatically as the industry panicked (similar to a bank run).
The coin, also called Terra, lost 98 percent of its value overnight.
“The Terra incident is causing panic in the industry, as Terra is the third largest stablecoin in the world,” said Ipek Ozkardskaya, chief analyst at Swissquote Bank.
But TerraUSD “could not deliver on its promise to maintain a stable value in US dollar terms”.
The cryptocurrency’s decline has wiped out more than $1.5 trillion in value from the markets, but investors are still hopeful that prices can recover as they did in the past.
However, unlike previous crashes, experts believe this latest price drop could be permanent due to broader concerns about a global recession.
Bitcoin reached a high of £16,194.81 on December 17, 2017 before dropping below £9,000 just five days later – losing nearly 45 per cent of its peak.
The price recovered to pre-crash levels in November 2021.
The economic downturn has led Coinbase, an online trading platform, to issue a stark warning to customers: Your cryptocurrency is at risk if the exchange goes bankrupt.
The Popular Stock Exchange witnessed a 27 percent decline in its value as a result of the collapse.
According to the official Coinbase website, the company has more than 98 million approved users. It is the largest cryptocurrency exchange in the United States.
Coinbase CEO Brian Armstrong tried to calm shareholders with a series of tweets, one of which read: “Your money is safe in Coinbase, just as it has always been.”
Despite Armstrong’s claims, the company referred to clients in a Securities and Exchange Commission filing as ‘unsecured creditors’ in case Coinbase gets confused.
This means that the clients’ crypto assets are considered the property of Coinbase by bankruptcy officials.
The SEC file, Personnel Accounting Bulletin 121, requires cryptocurrency exchanges to include client crypto holdings as assets and liabilities on their balance sheets.
Armstrong wrote on Twitter that the company was “not in danger of bankruptcy” despite the filing, which he said was done until the company complied with SEC regulations.