‘Bitcoin was, very simply, a new way of creating, holding, and sending money.
Bitcoins were not like dollars and euros, which are created by central banks and held and transferred by big, powerful financial institutions. This was a currency created and sustained by its users, with new money slowly distributed to the people who helped support the network.’
Nathaniel Popper, Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money
The first use of Bitcoin was to buy pizza and the cryptocurrency was adopted mainly by blockchain enthusiasts, interested in the technology and in how to make payments work faster, cheaper, and free from geopolitics. Gradually, exchanges, companies, banks, hedge funds, and mutual funds have also become interested in crypto, with big banks experimenting with cryptocurrency offerings and lobbying regulators to create rules that work in the banks’ favour. In 2019, JPMorgan even started its digital currency. Governments got also involved – in 2021 El Salvador started to accept Bitcoin as legal tender.
But not everyone is enthusiastic about crypto, and they have some good reasons why – the currency is volatile, implies monetary risks, is associated with money laundering, and the list can continue. Adopting Bitcoin as legal tender, at a country level is seen by the International Monetary Fund (IMF) as too risky. The fund concluded that move from El Salvador ‘entails large risks for financial and market integrity, financial stability and consumer protection’.
And was it right? Let’s unfold what has been happening in the crypto and financial markets in the last week to see what crypto implications are on international markets.
At the beginning of May, Bitcoin, the world’s most valuable cryptocurrency plunged. According to slate.com, nearly 40% of Bitcoin holders have lost all the money they had invested in the currency, as the value of a single coin has dropped below even last year’s post-crash July low. Other cryptocurrencies, sometimes referred to as altcoins, have been hit hard too. A large algorithmic stablecoin called UST, designed to be pegged to the dollar has failed and has been trading at 50 cents over the last few days. A related pure cryptocoin called Luna has also collapsed, going from USD 60 per coin two days ago to less than one dollar on May 12. Some say that this is one of the biggest collapses in crypto history, with over USD 50 billion in total value destroyed in a few days.
As a result, cryptocurrencies prove to be risky and susceptible to the same concerns as stocks, dragging down the Dow, S&P 500, and Nasdaq indexes.
What’s going on here: is crypto just an experiment or a long-term financial tool? Should they be used in other means than investment? How does crypto influence macroeconomics? How should regulators react? To answer some of the concerns and implications raised by the current crypto crash, we have invited crypto experts, investors, market participants, and crypto providers to share their expertise.
What could be the explanations behind the massive drop in the value of Bitcoin, Ethereum, and other cryptocurrencies over the past few months?
Nick Smart (NS), Director of Blockchain Intelligence, Crystal Blockchain
There is clearly some correlation with traditional financial markets; as they have turned bearish amid major geopolitical crises, such as the Russian war in Ukraine and the ongoing COVID situation in China, investors are less willing to entertain more risky assets. We’re in a tough time for the markets, and inflation is running high. When we say risk, we are not just talking about volatility; there are other market risks, such as regulation, security, and the like that also make it a difficult proposition. Technology has outpaced regulation.
These things are changing, and I believe the fundamentals remain good. The market crashed but remains pretty established for now; the growth of regulation and maturing generally of technology is reducing the risk exposure to institutions who are looking for ways to cater to a growing market and to make money amid some pretty terrible conditions.
Magnus Carter (MC), author
In his new book, Making More Money for You! Decrypting Cryptocurrency: Riding the Data Path to Financial Freedom, Magnus provides detailed guidance that explains virtually everything about the world of cryptocurrency, from the different types of cryptocurrencies and blockchains to a step-by-step approach for making wise investment decisions.
In these uncertain times investing has been the option for many across the world to try and make a profit. This environment is truly country neutral as it pertains to it knowing no bounds on a map. In an environment like this, there are countless explanations for how this investment performs. I am limited on the space for this article, so I have enclosed a few of them: inexperienced investors, a market that never closes, instability in political realms, and constant mining to introduce more currency than there is demand.
Douwe Lycklama (DL), Co-founder, INNOPAY
Douwe Lycklama co-founded INNOPAY in 2002 and is one of the thought leaders of digital transactions including crypto, payments, digital identity, and data sharing.
The massive drop in cryptos should be seen against the ‘risk-off’ macrotrend of the past six months where investors collectively deem assets too risky and prefer cash. The accelerating event was the large interest rate increases by central banks, to combat inflation. As a result, we see the US Dollar rising against all currencies, stocks falling and bond yields rising.
Could you please explain the LUNA and UST crash? What does it mean for the crypto industry? What about the financial world in general?
DL: Algorithmic stablecoins (such as UST, DAI) are a different category from fiat-backed stablecoins (USDC, Tether, GeminiDollar, etc.). These hold their value denominated in another crypto, like Luna in the case of UST. Luna is the stabilising mechanism. Buying UST with Luna reduces the Luna supply and selling UST (for Luna) increases Luna. So, when many people sell UST at the same time, a lot of Luna is minted, and price pressure occurs leading to a death spiral. Luna turned out to be inherently unstable.
A stablecoin is a type of cryptocurrency whose value is pegged to another asset class, such as a fiat currency, like the US dollar, or gold, to stabilise its price. Why didn’t the stablecoins do their ostensible job?
DL: The fiat pegged stablecoins do their job, they are still in function, although under heavy scrutiny of course. The 5y old debate about the reserves of Tether fired up again, and there were some drops in the price last week, to recover fast. But still, people are nervous. Tether is by far the largest stablecoin.
To sum up, stablecoins with a sound reserve are possible and do the job they should do. It is comparable with electronic money, which is also full reserve. In the future, CBDCs could perform the stablecoin task as well.
Stablecoins are of many types, but the issues popping out last weekend were about algorithmic stablecoins, how should stablecoins issues be treated/regulated to avoid treating all crypto the same?
DL: Stablecoins could (or should) be regulated through their ‘proofs of reserves’, like banks and pension funds, audits, etc.
We’ve seen Coinbase stock now down (and not only Coinbase), how does crypto crash influence the businesses operating in the crypto space?
MC: Everything that has been mentioned so far, plays a role in the business world as well. The companies that are invested in crypto will need to make their investments somehow. Usually, this means budget cuts and higher prices to their consumers to name a few. Until now, we have only experienced huge gains but rarely seen a rigorous downslope to investing in crypto. With this huge slope, there has been panic all around the world and causing investors to dump their investments. This leads to the domino effect of prices plummeting even lower for a bigger loss. Which makes this market super volatile.
How can Bitcoin volatility be overcome?
MC: The volatility cannot be completely overcome because there are no guarantees in investing however, some steps to limit this can be regulations on mining, limiting trade hours, and setting trade limits just to name a few.
What about merchants adopting crypto as a payment method? And mostly, what about consumers, how are they affected?
Raphael Tetro (RT), SVP Merchant Services, Nuvei
As SVP Merchant Services, Raphael drives Nuvei’s rapid expansion into new verticals and territories.
While there are estimated to be more than 300 million crypto users worldwide, the use of crypto for merchant payments is currently relatively low, which reflects several things, including how young this nascent industry really is. That said, crypto as a payment method has grown significantly with some estimates putting global crypto payments at around USD 20 billion last year, with digital content, luxury travel, and goods representing a quarter of this. Many businesses have ongoing roadmaps to test, pilot, and explore crypto-related payment capabilities.
Ultimately, successful consumer-to-business mass-market payments require both consumer and merchant demand in addition to regulatory clarity, security for consumers, and operational clarity and simplicity for merchants.
How can fraudsters monetise the situation?
NS: There are a few ways that fraud can work in a difficult market; mostly, by suggesting to down-on-their-luck traders ways to make the money back easily. At the end of the day, some have lost significant amounts of money and maybe are desperate to find a solution to their losses,…