Why Crypto Crashed and What to Do Next
On Thursday, May 12, CoinMarketCap estimated a whopping $200 Billion-loss in cryptocurrency’s market causing great dismay amongst investors and placing the viability of cryptocurrencies as an investment option under the microscope once again. Bitcoin, the first and most popular crypto, was far from unscathed in this downturn as it plunged 10% down — its lowest level since December 2020 — and lost a total of 40% of its value, while altcoins like Ethereum and Binance Coin were down for 48%. It was a biggest blow on the crypto market after weeks of increased volatility, and while the market has since steadied a bit on Friday, it’s understandable if a lot of newer users are still restless and prospective users are left dissuaded to venture into DeFi by the news.
But what caused this crash anyway? How does this affect the financial system as a whole? And, perhaps more importantly, what should we do next when the market faces such blows?
Why the market is down
“Increasing inflation, higher interest rates, and geopolitical instability caused by the war in Ukraine.” It has nothing to do with crypto’s technology but, rather, all these external factors — that is what Bank of America global crypto and digital asset strategist Alkesh Shah had to say to Fortune in an interview after last Thursday’s crash. It was a sudden loss, sure, but Shah argues that despite it, the market value of crypto’s sector remains higher than it was over a year ago and that such downward movement is small compared to huge gains crypto earned over the course of 15 months.
Meanwhile, experts also link this crash to the collapse of Luna, a South Korean-based crypto whose value is tied to its support coin, terraUSD (UST). UST is a stablecoin which means it’s supposed to provide more stability in times of market volatility by being tied to the value of traditional currency. UST is pegged to the US dollar, which means that one UST’s value must always remain equal to or above $1. However, in what Bloomberg Intelligence calls the worst day any financial product has ever seen, UST’s value plunged into 30 cents and Luna lost 99% of its value on Thursday, all this just two days after Coinbase, one of the world’s largest crypto exchange platforms, suffered a net loss of $430 million.
The value of cryptocurrencies now
Many cryptocurrencies, including Bitcoin, have started stabilizing since the crash. As of writing, below are the values of some of the world’s top cryptocurrencies:
Bitcoin, the world’s first and largest cryptocurrency is currently at $29,779.33. It went down by 11.42% percent the past week but went up 0.47% in the last 24 hours.
Ethereum blockchain network’s price is up at $2,026.10, increasing 0.21% in the last 24 hours.
Some of the biggest gainers in the last 24 hours have been MyKingdom (MYK) at 1139.22% growth, Ethos Project (ETHOS) at 846.46%, and Metacyber (METAC) at 719.75%.
Meanwhile, Luna is still down at 54.33% percent in the last 24 hours, with its value plummeting to $0.0002358. In a tweet from the official account of Terra, it was announced that the blockchain has been halted while its Validators are working on ways to reconstitute it.
For real time updates, you may check CoinMarketCap.
(Screenshot from CoinMarketCap. Values are as of May 16, 2022.)
How this affects the financial system
The crypto market had a value peaking at $3 trillion halved by the recent crash. The same way that crypto’s value is affected by forces outside its technology, experts have expressed concern that crypto’s fluctuations may also have dire effects in the larger economy. Such is the possibility presented by what happened with TerraUSD and other stablecoins.
Despite being pegged to traditional value assets, Stablecoins like TerraUSD (LUNA) proved themselves still susceptible to the plunge leading the U.S. Federal Reserve, Treasury Department as well as the International Financial Stability Board to brand stablecoins as a potential threat to financial stability.
Again, Stablecoins are designed to be linked to traditional currencies to facilitate, as their name suggests, more stability in crypto’s values to counter the technology’s volatile nature. However, the recent downturn proves that this link to the dollar causes a spillover of crypto’s value fluctuations into the traditional, centralized financial system. And because more and more companies are beginning to adopt crypto, regulators are now assessing what a crypto crash such as last week’s could mean to the global economy and the traditional financial system as a whole.
What to do next
They say that once you hit rock bottom there’s now way to go but up. And this, perhaps, is the primary philosophy behind buying crypto while its value is low. This practice is hinged on the premise that a crash in cryptocurrency’s value is an opportunity to spend less and eventually sell high: the dip is temporary and we will reap the rewards once its value rises again.
Before we proceed, let it be known that this is in no way a personal financial advice, but instead an attempt to level-headedly view such events.
We have covered how cryptocurrency’s technology, by design and with its youth, is volatile. Buying crypto in itself is a risk, let alone when you’re buying crypto amidst such a downturn. Bitcoin, for example, may be recovering and it might have recovered from similar dips in the past, but this does not necessarily guarantee its history to repeat itself.
Some experts’ take on the situation can be polarizing. Some believe that this is a great time to begin for new crypto investors because despite the dip, established cryptocurrencies like Bitcoin, Ethereum, BAT, are still relatively strong compared to 16 months ago. On the other hand, others think that new investors need to wait for a few months to let the situation stabilize.
Should you decide to start investing in crypto now, or if you’re already an investor considering buying more assets right now, it would be wise to exercise caution; refrain from large purchases now that the market is just beginning to recover from the past week’s plunge. Great wins may come from great risks, but so do great losses. But if it’s just an amount you are comfortable to lose, then perhaps you should take that chance.
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