Cryptocurrencies witnessed a tumultuous boom and bust cycle over the past year as the two largest digital coins, Bitcoin and Ethereum, climbed to an all time high last year before losing a majority of their value over the past few sessions.
In addition, almost all of the cryptocurrency investors recorded losses and many exited the market permanently. All digital coins are now on a decline and the once lucrative investment and easy money scheme has turned into a sour fruit.
Tech enthusiasts have termed the current bear run in the crypto market “crypto winter.” Given that cryptocurrencies are a relatively new phenomenon and investment avenue, there are multiple things that tech savvy people can learn from.
Bitcoin sets the trend
It is no surprise that bitcoin is the market leader of the cryptocurrency ecosystem and being the first digital currency, it has turned into a trend setter. A rise in bitcoin means that nearly 60-70% of all digital currencies will witness some kind of an increase while a fall in bitcoin drags all other digital currencies lower.
Many cryptocurrency exchange founders and creators of new digital coins have tried in vain to end bitcoin’s dominance.
However, they have proven to be unsuccessful so far.
The exchanges have gone as far as creating exchange traded funds of different e-currencies alongside bitcoin but they still failed to beat the market leader.
At the end of the day, the direction of bitcoin dictates the direction of the overall market. Therefore, one can gauge the state and outlook of the cryptocurrency market just by observing the trend of bitcoin.
In a deregulated market, one element can rise above all others and that is exactly what bitcoin managed to do.
Stablecoins are not stable
Given that cryptocurrencies are a new phenomenon, there are a lot of myths that keep on busting.
Once upon a time, the assumption was that stable coins are a safe-haven investment within the cryptocurrency ecosystem and can be used interchangeably with the dollar.
However, the patterns noted over the past few days have proven investors and speculators wrong.
Stablecoins are a classification of cryptocurrencies that are less volatile and considered relatively low-risk assets.
To reduce or nullify volatility, such digital currencies are pegged to an asset price. Usually, stable coins are pegged to dollar to offer an intrinsic value of $1. However, in May 2022, two stablecoins, Terra and Luna, plunged and their values fell to 0 from $1 in a matter of minutes.
This incident wreaked havoc in the stable coin market and dragged all of them downward. This reduced investors’ confidence in stablecoins and the cryptocurrency market as a whole.
It also revealed that anything possible in the crypto ecosystem and most beliefs are just myths. This also inched stable coins towards extinction and ended the debate over whether stablecoins could be treated as safe havens.
Crypto cannot rival gold
Owing to the fallout from Covid-19 and the looming recession, people turned towards cryptocurrencies to safeguard their purchasing power. Many of them drew similarities between cryptocurrencies and gold because seemingly both were safe haven investments during unprecedented times.
The ongoing bear run has shattered this notion and digital coins can, in no way, be compared to gold in terms of risk mitigation.
Similarly, gold, being a physical asset, is limited in terms of quantity but digital assets run on computer programs and can turn unlimited in quantity. Therefore, comparing the value of a physical and limited asset to a virtual and unlimited asset is meaningless.
Control of the market
The entire cryptocurrency market of the world is deregulated meaning that there are no laws governing it. This can give individuals the power to control it single-handedly.
As of late, Tesla Motors CEO Elon Musk has influenced the entire market through a series of tweets.
This problem can prove to be a threat for the entire market being in the hands of big-wig investors and corporate groups is increasing.
Crypto exchanges in trouble
The crypto winter has spelt doom for exchange companies specialising in the trade of crypto assets Coinbase Global, the largest cryptocurrency exchange shared plans to cut about 1,100 jobs, or 18% of its workforce this week.
"We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period," Chief Executive Officer Brian Armstrong said in a blogpost.
Similarly, many lesser know cryptocurrency exchanges are either limiting services, laying off employees, closing down permanently or bringing in physical assets to trade. The cryptocurrency crash has destabilised the entire crypto exchange system. This was a huge business that emerged out of the popularity of cryptocurrencies.
BitOasis, a Middle East-focused cryptocurrency exchange based in the United Arab Emirates, also laid off its staff in the face of a downturn and market turmoil.
Celsius Network froze withdrawals and transfers citing "extreme" market conditions, in the latest sign of the financial market downturn hitting the cryptosphere.
Adoption loses steam
Few months back, a handful of companies announced to offer cryptocurrency payments on their platforms with Tesla Motors taking the lead. Moreover, PayPal, MasterCard and other big companies also jumped in in order to cash in on the hype.
Presently, the move has lost steam and all companies have become cautious while offering cryptocurrency payments on their platforms. This has dealt quite a setback to the same digital currencies that seemed promising only a year ago.
Metaverse
The metaverse is a virtual world being created by social media companies promising to revolutionise social media.
Meta, the company that owns Facebook, Whatsapp and Instagram, is creating a digital world known as the metaverse which take human interaction to the next level.
Cryptocurrencies will play a vital role and they are expected to see a rebound once the metaverse goes into effect.
However, until then, it will remain a trial and error phenomenon.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is a Senior Sub Editor at Business Recorder (Digital)
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