The Crypto Crash Offers Opportunities

Crypto Weekly

The largest digital asset, Bitcoin, fell by more than 25% in the past week due to the cryptocurrency crash. The scale of the selloff is massive, but this isn't the first time cryptocurrencies have experienced extreme volatility.

Wall Street is looking for opportunities. During the past 24 hours, Bitcoin fell 11% to $28,000, briefly dipping below $26,000. Last week, the largest crypto was changing hands for around $40,000. Six months ago, it was sitting at its all-time high near $69,000.

"While we can't call the bottom, and correlations among asset classes remain elevated, Bitcoin has survived corrections of 70-80% in the past," Martha Reyes, the head of research at digital asset broker and exchange Bequant, said in a note. "This may be an opportunity for institutions to build positions at better levels."

The last time Bitcoin saw a crash was last year, when the crypto similarly collapsed by more than 50%. It happened over just three months, with Bitcoin dipping below $30,000 in July 2021 after topping $63,000 in April. Bitcoin would hit its all-time high some four months after that summer low.

Crypto history is littered with other examples. Bitcoin neared $18,000 in December 2017 and was below $7,000 by early the following February. Bitcoin's even earlier days hold more cases.

A troubling development in the recent crash is the situation with stablecoins, which are widely used tokens pegged to a real asset, usually the dollar. A recent meltdown of the stablecoin Terra (UST) –42.75% has already put downward pressure on Bitcoin, and Tether (USDT) +0.02% —in some ways, the bedrock of the crypto economy, with daily trading volumes more than double those of Bitcoin —is the latest casualty. The price of Tether fell below 96 cents per dollar on Thursday.

Tether and other stablecoins are used by traders as a source of safety in a volatile world. They have become a top medium of exchange for payments, lending, and other activities based on blockchain technology. It is a systemic risk for the crypto ecosystem if stablecoins fail. "The uncertainty around stablecoins is a concern and may lead to another flush out," said Reyes. "But we may finally get the much-needed regulatory framework that could entice institutions."

The uncertainty around stablecoins is a concern and may lead to another flush out

Martha Reyes

The head of research at digital asset broker and exchange Bequant Regulators worry that if stablecoins take off as privately issued digital money, they could pose risks to broader financial markets and monetary policies. A run on a stablecoin could, in theory, lead to heavy selling in assets held as reserves, such as short-term commercial debt or other cash proxies. “The markets are melting, but this may allow institutional players to start building positions and push stablecoin regulation to provide more confidence," said Reyes.

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After dipping briefly below $30,000 for the first time since July 2021, Bitcoin took a brutal fall. Bitcoin is worth less than half of what it was last fall. Other cryptocurrencies, such as Ether and BNB, have suffered similar declines, and volume trading on major exchanges has slowed. Crypto winter is now being predicted, in which a prolonged decline by some will replace the sector's astonishing growth.

Several factors are causing Bitcoin and other cryptocurrencies to slide, including larger financial markets and the crash of a major stablecoin. Below are some of the main factors behind the current decline.

Unlike other financial instruments, Bitcoin is not independent.

Bitcoin, the most popular cryptocurrency, is not centralized or controlled by any authority. Evangelists of crypto have long hoped that its independent nature would prevent inflation and crises. It was argued that Bitcoin's independence from the government would ensure its value would persist in the face of economic declines, wars, or drastic policy shifts. These arguments have been disproved in recent years. In March 2020, when the Coronavirus pandemic ravaged the global markets, so did Bitcoin, which fell 57%. Both stock markets and cryptocurrencies recovered and rose at a staggering rate, which analysts believe was triggered by a combination of free time, disposable income, and pandemic-relief funds pumped by governments.

Since the Federal Reserve and other central banks raised interest rates in response to inflation, investors have been wary that change may be in the air. Bitcoin, which is wildly fluctuating by nature, may seem risky to investors seeking a safe harbor. The Bitcoin fall follows the Dow and Nasdaq's worst single-day declines since 2020 and the S&P 500's nadir in December. As a result of Russia's invasion of Ukraine, the market

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Many believe Bitcoin adoption has been slower than expected," Moya said. "At the moment, we are seeing a wait-and-see attitude in the crypto market

Edward Moya

Oanda's senior market analyst

has been unsettled, causing inflation, supply chain issues, and high oil prices. In the face of COVID-19 outbreaks, an economic slowdown in China also contributes to financial anxiety. The price of Bitcoin will decouple from the stock market down the road, say some crypto evangelists, but the two are very attached now.

The cryptocurrency market is highly volatile.

Cryptocurrency has generated a lot of hype, but even its biggest advocates will admit that success is not guaranteed. In fact, volatility is one of the main reasons many speculators are attracted to crypto: they can make money faster than in traditional ways.

Unfortunately, the promise of the boom is also the promise of the bust. Several major bear and bull cycles have occurred since Bitcoin was introduced in 2009, with shortterm investors flooding the market and then losing interest. Price drops can be exacerbated by a lack of cash flow, whether from selling shares or other reasons. Traders can invest with borrowed cryptocurrencies on many exchanges, especially during high times.

Crypto crashes tend to happen on weekends for a reason. Investors usually tune out during that time to make a big splash. In 2021, more than half of those who owned crypto had just entered the market, according to Grayscale Investments.

Regulators and hackers are top concerns. Crypto's value is partly derived from people's belief in it to be rattled by skepticism or policy changes. Crypto enthusiasts have watched in awe as governments have begun to regulate crypto trading and mining in countries such as China, the U.S., India, and Germany. In China, for example, a crackdown on Bitcoin mining caused the price of Bitcoin to drop from $64,000 in April to $36,000 in June in mid-2021. Around the same time, the total market capitalization of cryptocurrency also declined when Elon Musk announced Tesla would stop accepting Bitcoin in May 2021 due to concerns over the environment. Crypto has been rocked by hacks and security breaches, including a $600 million hack of Ethereum's Ronin sidechain. Recent hacks have shaken consumer confidence in crypto, which has slowed growth from new potential buyers.

CBS News reported that Oanda's senior market analyst, Edward Moya, said that new entrants to the crypto space are slowing this year. "Many believe Bitcoin adoption has been slower than expected," Moya said. "At the moment, we are seeing a wait-and-see attitude in the crypto market."

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Consolidation phase next," where copycat blockchains die out. "There will be blockchains that, rather than die, get acquired or merge

Mark Cuban

Billionaire

TerraUSD or Simply, UST

According to some experts, UST, TerraUSD, one of the largest stablecoins, is also thought to have contributed to the recent Bitcoin crash. As part of a pseudobank run, TerraUSD, also known as UST, sank below 70 cents on Monday as holders panicked and sold their tokens en masse. A Luna Foundation Guard, which safeguards UST's price, drained its Bitcoin reserve of $1.3 billion and bought another $850 million in Bitcoin to protect the stablecoin's price. According to Corey Miller, growth lead at dYdX, "The action could add significant sell pressure on Bitcoin, causing the markets to drop alongside its price." In the same article, Cubic Analytics' Caleb Franzen explained that "historically negative performance" can lead to "continued selloffs," which negatively impact prices.

The "Consolidation Phase is here," according to Mark Cuban.

We don't know how long the crypto slide will continue. Some predict things will only become worse as investor panic increases. “The 'consolidation phase' is coming,” Billionaire Mark Cuban recently stated. He said he is reliving the internet boom when he looks at crypto.

Cuban's first fortune came from the Web1 '90s, and he sees the same thing happening in crypto today. "Crypto is going through the same lull as the Internet did," he tweeted last week. "Every chain that copies what everyone else has will fail," he added. Several "exciting" blockchain based innovations have emerged recently in the crypto sectorincluding non-fungible tokens (NFTs), decentralized finance (DeFi), and play-toearn applications, but–“There has been an "imitation phase" where new blockchains copy popular, existing applications and bring a variation of them to market,” Cuban said in his tweet. Similar behavior was seen during the dot-com boom in the 2000s when internet startups launched copycat products and promised returns before the bubble burst.

Cuban says there will be a "consolidation phase next," where copycat blockchains die out. "There will be blockchains that, rather than die, get acquired or merge." He said he sees the biggest opportunity for crypto companies and blockchains to use smart contracts or collections of code that execute a set of instructions on the blockchain. Cuban tweeted that businesses that use smart contracts to improve productivity and profitability will gain a competitive advantage. "The chains that realize this will survive." When the price of Bitcoin dropped below $30,000, evangelists "bought the dip" or entered the market at a discounted rate, and its price corrected. Despite its daily turbulence, they believe that Bitcoin will grow at a zoomed-out rate similar to last.