The week the crypto dream collapsed
The current crash has killed the dream of a new monetary era
Only a few months ago, crypto advocates were making wild proclamations about a looming monetary revolution. Bitcoin would reach $100,000, $500,000, maybe even $1,000,000, granting holders “financial freedom,” while VCs on social media touted NFTs (non-fungible tokens) as a rebellious alternative to dubious subprime-era CDOs — pools of risky loans packaged together and sold on to investors. What could go wrong?
Everything, as it turns out. Because those same declarations now appear foolish. To anyone who’s studied previous financial manias, it should not surprise them that crypto has proven itself to be simply the latest speculative bubble. Along with other underperforming crypto funds — like Cathie Wood’s ARK Innovation ETF (down 56% year-to-date), cryptocurrencies have tumbled: even Bitcoin has plunged roughly 40% in 2022. It dipped 5% just yesterday, following a sky-high CPI (consumer price index) print of 8.3%, once again disproving Bitcoin as an “inflation hedge.”
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Bitcoin’s sharp decline, however, has been merely a sideshow to the main exhibit: the ensuing collapse of crypto’s latest notable contraption: Terra ($UST), an “algorithmic stablecoin.” Using an “arbitrage mechanism” involving its sister cryptocurrency, Luna, market participants in theory would be incentivised to maintain Terra’s $1 “peg,” thereby creating a currency with a stable unit of account (i.e 1 UST always equals 1 U.S. Dollar).
Yet to the shock of Terra holders, its $1 peg snapped under the immense pressure of the latest crypto market selloff. It was only two weeks ago on Twitter that its founder Do Kwon proclaimed Terra would “open a new monetary era of the Bitcoin standard” that’s “easier to spend” and “more attractive to hold.” Still, the stablecoin fell as low as $0.30, while its sister token Luna nosedived from $82 to — wait for it — 15 cents!
Crypto advocates are slowly realising why legacy power structures and their systems exist and, despite various bailouts and trading shenanigans, why the masses still prefer traditional finance over crypto. Proving once again that holding a computer science degree does not grant you automatic financial expertise, crypto bro Emin Gün Sirer laid out his thoughts on the Terra fiasco: “I have always said that [algorithmic stablecoins] are subject to bank runs,” he tweeted. “The only mechanism against this is a strong, active team that performs open market operations,” and in doing so, unintentionally described the main function of crypto’s boogeyman: central banks.
While crypto bros cling to the unrealistic dream of separating state institutions and money, the general public has even more reason not to engage with the crypto. It’s about to get worse, not just for Do Kwon and the crypto space, but for all financial assets high on the risk spectrum.
With interest rates way above their recent historical average, the crypto collapse is likely just the start, not the end, of a wider reckoning. If you think keeping up with the latest crypto chaos has been a strenuous task, wait until it finally snaps.
Greg Barker is an independent journalist and quant, who also writes under the name Concoda. You can find him on Substack and Twitter at @concodanomics.
I agree with Greg Barker that markets are certainly highly volatile and that risk appetites are under a serious test. In the case of being a smart investor, rule 1 is having a diversified portfolio. For me, whilst I hold crypto, I also hold stocks, funds, etc. as well. For context, whist bitcoin has fallen by 41% year-to-date, it is worth comparing to a few other things people may be familiar with since 1 Jan 2022:
S&P 500 index: -18%; Tesla: -39%; Microsoft: -23%
These are certainly trying times for those of us who hold Bitcoin and other cryptos (I never thought stable coins were the way to go), but these are still early days in the arc of cybermoney as instruments that cannot be inflated to lose their future purchasing power. My prediction is that whilst larger institutions have dumped their crypto holdings and have thus driven down the prices, those of us who are in it for the long-haul will see it rebound when this financial dip that is affecting almost all assets has receded.
It’s all very virtual, and maybe people will realise that the Metaversus is also the same thing, not in touch with reality.
Bitcoin rises for thirteen years. There are huge falls, but the rises are so big, you need a logarithmic scale to plot its value against any other currency bar the Venezuelan Bolivar. Right now, it’s going through a downturn compared to its $60K+ height. From this, the author concludes “the crypto dream” has collapsed. This article is unworthy of UnHerd.
Crypto may well take a few backward steps but with more and more states in the “west” moving from social contract based governance to extractive or extortive systems i expect BTC especially will be back. Bit like the 1820s when there were 100 paper Montana $s per 1 Californian silver $ so the U$D was once a challenger currency, and many early US citizens would only accept goods or gold not “paper money”.
Asset prices drop when demand disappears. Most assets have some kind of floor beneath them – the need for houses may drop but it can only go so low because everyone needs a house to live in. Stock prices are supported by the value of a company. There is no such floor for crypto currencies – no externality that supports their value other than the perception of the market. I don’t think the abstract ‘need’ for an alternative currency supports the value of any particular currency. So when demand dries up, triggered by a general downturn and people need to cash out, the emotional panic begins and the historical pattern repeats itself – the death spiral is essentially unstoppable and the value can quite literally go to zero. Skeptics have been pointing this out for years of course, but we’ve been mocked. That dynamic is part of every historical bubble also.
I have never owned Bitcoin but I do know it is like a Vampire – it has been called dead before more than once before rising again
You have buried the lede – the destruction of Terra (Luna and UST) was a coordinated attack by massive players manipulating the coins in order to crash the price of both Luna and Bitcoin in order to profit themselves. Much better and more detailed explanations of what happened have been written. The crypto market is still immature and lacks the liquidity (and regulations) to defend itself against this type of manipulation. Terra may have been destroyed (Do Kwan is vowing to “build it back”), but Bitcoin is still alive and strong. What you did get right is that Bitcoin is definitely not an inflation hedge or a stablecoin that can replace gold.
If you are convinced prices will go on going up it is easy to believe that someone will come along and buy your investment at a higher price than you paid for it. But why should they? The only sensibly price to pay is a price supported by dividends, interest and documented promises from credit worthy parties. You can build in to your calculation high growth rates but not rates that exceed the world’s population or the percentage of world GDP that will be spent on advertising. You can support fashions but should not ignore them being replaced by new fashions.
In many ways it is better for stock prices to drop to sustainable levels than people to persist in the illusion that they have wealth that has no economic value supporting it.
Look out for consequences. Banks who have lent on overvalued stocks or even more foolishly crypto-currency. Trump’s comeback – look what happened to your wealth when the election was stolen from me.
One man dream is another man’s nightmare.
This has been a fabulous development for crypto. All of the moonboy meme following “investors” are getting flushed out giving the true nerds some space to continue building cool things. This space got too hot too fast.
Crypto isn’t ready for the mainstream and this proves it. Crypto has huge potential though, it just needs room for continued development and innovation. Bitcoin, the OG crypto is only 13 years old. You can’t possibly berate a 13 year old for not having their shit together.
This very similar to the dot-com bubble bursting, too much hype without any actual substance. I knew several people back in 90’s who talked about how this new world-wide-web thing is just a fad and how there’s no possible way connecting computers together is going to have any impact on their life whatsoever. We see how that worked out.
I’ve done well out of cryptos purely by luck – any fool’s investment decisions are good on a rising market. The 10.5 year bull market up to the scamdemic was really straining the old “7 year cycle” but the subsequent papering over the cracks is foolish. Even George Osborne knew to dampen the mania in 2016’s oil spike and borrow to let boom. Now its like 1991 all over again. Once the dam bursts we’ll all be the worse for it.
From the beginning I had a gut distrust of this, which grew as I read more and understood the details of it technically. A lot of what I read seemed cargo-cult thinking.
I feel justified now, though it took its time to play out.
Not clear that stocks will be much of a hedge when so much of finance is tangled up in crypto now. When the actual run on stablecoins happens and collapses exchanges, leaving billions unable to be withdrawn, then I expect all the folks who have to cover their leverage to start liquidating assets pronto.
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