If you think digital currencies are largely experimental and unregulated, the recent crash in cryptocurrency may bear your opinion out. At the minimum, it illustrated the risks involved. But how did it come about? This post discusses the answer. It also discusses what you should know about cryptocurrencies melt down.
The origins of cryptocurrencies
The origins of cryptocurrencies is traceable to the creation of Bitcoin in 2008. Satoshi Nakamoto created virtual currency as a decentralized alternative to the usual or traditional financial system. Essentially, Bitcoin users would prefer to conduct transactions among themselves rather than rely on gatekeepers such as banks. Meanwhile, users record each transaction on a shared ledger referred to as a blockchain.
Cryptocurrencies become popular and more valued
Mr. Musk, Marc Andreessen, and Jack Dorsey are just a few prominent names made cryptocurrencies popular. Unsurprisingly, with the increase in the value of cryptocurrencies, a new class of crypto billionaires emerged.
Meanwhile, other forms of cryptocurrency like Ether and Dogecoin also came up. More so, with the pandemic, the financial system had excess cash that easily led users to day trade for leisure.
Finally, cryptocurrency prices reached a peak in late 2021. It began to slid up till its current meltdown.
The recent crash in cryptocurrency prices
Recently, the price of Bitcoin fell to its lowest point since 2020. In addition, other virtual currencies such as Ether declined overnight. In fact, the crash in cryptocurrency resulted in a clear-out of over $300 billion. Basically, the crypto world spun into full meltdown with a massive sell-off. What could make a cryptocurrency that has promoted itself as a stable means of exchange collapse so much?
Although, Bitcoin declined by 80 percent in 2018, this recent reset has proven to be the worst reset in cryptocurrencies. This is made even more widespread as many people flooded into virtual currencies recently.
The rapid decline is more acute for recent investors
Those investors who bought cryptocurrencies within the past year- when the prices surged – are apt to feel it more.
The reason for the fall in cryptocurrencies
Inflation and rising interest rates are some of the factors responsible for the fall in cryptocurrencies. Another important factor is the economic uncertainty due to the Russia-Ukraine conflict. All these result in a broad pullback from risky assets.
As regards what you should know about cryptocurrencies melt down, the reason for the gathered momentum of the meltdown is the implosion of TerraUSD – a stablecoin. Since stablecoins are considered as more reliable as a means of exchange. Many traders use them when buying other cryptocurrencies. Furthermore, they are pegged to stable assets like the U.S. dollar.
Consequently, credible venture capital firms felt free to invest tens of millions of dollars to fund various crypto projects. Naturally, this gave some people confidence in crypto platforms. However, a sister cryptocurrency called Luna backed TerraUSD. So, when Luna lost virtually all its value, TerraUSD fell very low.
Concurrently, Tether – a most pupoler stablecoin backed by traditional assets – also fell low. But it recovered. However, other parts of the crypto ecosystem did not recover the same way. Coinbase- a major cryptocurrency exchange – reported a quarterly loss of up to $430 million and a loss of up to two million active users.
Future predictions
Based on a study by Mizuho, average Bitcoin owners on Coinbase may not lose money until a fall in price below $21,000. In addition, some analysts have described panic over falling cryptocurrency prices as probably overblown. Besides, there are professional investors who have remained calm in the storm.
Nonetheless, other crypto traders are truly concerned. After all, since other assets are also down, they cannot sell their assets.
Meanwhile, there are calls for a regulatory framework for the stablecoin ecosystem.
Wrapping it up
Even with this real-life demonstration of the risks of using cryptocurrencies, there may still be hope. This is so even when the duration of the crypto collapse is unclear. Usually cryptocurrency prices do rebound from heavy losses. Also, with what you should know about cryptocurrencies melt down, you are better informed. However, it might take some time for a full rebound.