Bitcoin and Ether have each lost more half their value since November; the most speculative “meme coins” are now down 80% or more; and so-called stablecoins meant to trade at a set dollar exchange rate are suddenly wobbling.
Crypto, of course, has experienced epic crashes before, but it’s never had to face off against a macroeconomic backdrop like this one. Critics from traditional finance can’t wait to dance on crypto’s grave, but it’s important to remember the lessons of the dot-com bust in internet stocks: Many narrative-driven investments will falter, and some will plummet to zero, but the next Amazon.com may emerge from their ranks.
Crashes are always painful in the short run, but they can also root out the scammers and wannabes and set the stage for true innovation. When the dust settles, capital will flow again toward the projects that have proved robust enough to survive a market downturn. Blockchain technology is reducing friction and improving the timeliness of payments; it offers a powerful tool for verifying and conferring ownership of assets; and cryptocurrencies are part of that revolution.
It’s also important to remember that crypto assets aren’t a monolith. For now, an algorithmic stablecoin faces the most pressure. In the past week, the peg for TerraUSD coin, which was designed to always be worth $1, collapsed in an unraveling that led creator Terraform Labs to halt new transactions on its blockchain Thursday. As faith-based crypto projects go, TerraUSD is chief among them. The peg works through a promise that TerraUSD can always be exchanged for a dollar’s worth of its Luna token, whose value fluctuates, but the peg ultimately relies on Luna being worth something. It’s tenuous, to say the least, and the crisis of confidence — which looks something like an old-fashioned bank run — has also exerted some pressure on Tether, a much larger stablecoin that’s supposedly backed by more tangible reserves.
Blockchain.com’s chief executive officer, Peter Smith, tried to put a positive spin on it on Twitter:
The bank runs of the 1930’s; the elimination of the gold standard in the 70’s and the financial crisis 14 years ago were jolts to the FS that ultimately led to growth. The stablecoin challenges we’ve seen this week will lead to a better, stronger ecosystem.
Smith is right. It’s also worth noting that the largest digital currencies, Bitcoin and Ether, are essentially holding their own in the chaos. So far, they aren’t weakening much more than one would expect of a high-beta risk asset. Bitcoin and Ether are down about 54% and 57% in the past six months, respectively, which is less than the ProShares UltraPro QQQ, which aims to deliver 300% of the daily performance of the Nasdaq 100 Index. The charts look almost identical:
While the tech-stock correlation renders laughable the claim that Bitcoin is a gold-like refuge, it’s hard to conclude that there is something uniquely terrible going on with the largest cryptos: They’re awash in the Federal Reserve fallout just like countless stocks on the Nasdaq, and they face much more volatility ahead, just like those companies.
When faith-based booms fizzle in global markets, most speculative assets will struggle — and some won’t survive. For every Amazon in the crypto world today, there are thousands of equivalents of Pets.com, the company that went public near the peak of the bubble and then liquidated within a year. Industrywide, this won’t mark the end of times, and it may even prove a positive development. There’s a reasonable possibility that the Amazon of cryptos hasn’t even been created yet. But ultimately, digital currencies and blockchain are fixtures in the financial system, no matter what happens to the market in the year to come.
More From Other Writers at Bloomberg Opinion:
• Matt Levine’s Money Stuff: Crypto Could Be Contagious
• Crypto’s Chainsaw Massacre Bloodies Exchanges: Lionel Laurent
• TerraUSD’s Struggles Are a Concern for All Markets: Aaron Brown
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company’s Miami bureau chief. He is a CFA charterholder.
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