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When Will The Cryptocurrency Craze End?

Do you want to know when will the cryptocurrency craze end? Even if you don’t live and breathe cryptocurrencies, you’ve most likely observed some upheaval in the market.

The media’s attention is drawn to missing apes and falling stablecoins, but what’s happening on?

How Did The Crypto Market Unravel?

As with so many things, it happened gradually at first, then all at once. Consider bitcoin, the initial cryptocurrency, which accounts for around one-third of the sector’s worth. Since the end of March, the price of a single bitcoin has been gradually declining, paralleling a larger malaise in the technology industry.

That makes sense: investing in bitcoin, like investing in any other technology stock, is a wager on the likelihood of more technological change. With inflation cutting down post-pandemic growth on both sides of the Atlantic, and a nagging feeling that excessive optimism had led to an overvaluation of technology in general over a previous couple of years, the entire industry began to fall.

The dam then burst in early May. It fell more in a week than it had in the previous month. The immediate cause was infection from another cryptocurrency project, Terra, which was originally valued at more than $50 billion but finished the week practically worthless.

Other coins followed Terra’s demise. Initially, comparable projects’ valuations fell as investors thought they would follow; later, panic grabbed the entire industry, and even comparably blue-chip tokens, such as bitcoin itself, fell.

The crisis didn’t end until mid-May, and while the market has restored some stability, it shows no signs of rebounding to last month’s highs. According to one CEO, we may be on the verge of a “crypto winter.” That is the optimistic attitude within the industry; pessimists believe this is the beginning of the end.

Was That Decline Related To The turmoil In The Regular Economy?

Probably. In recent months, technology equities, in general, have been hammered, with rising inflation undermining the attraction of fast-growth, low-profit investments and a succession of devastating revelations from the major businesses raising fundamental doubts about their prospective development.

Bitcoin supporters may portray their currency as a kind of “digital gold,” with a restricted supply that allows it to operate as an effective inflation hedge. In actuality, however, as inflation increases, bitcoin falls, and as economic prospects decrease, so does the potential of a digital revolution.

Furthermore, the crypto economy appears to be disproportionately driven by retail investors, who regard the sector as a midway house between traditional day-trading (already a stunningly dangerous form of investing money) and plain gambling. As growing expenses hit, those investors may be obliged to sell part of their assets, further depressing the industry.

What Happened To Terra To Make It Crumble?

Terra was a proposal to create a “stablecoin,” which is a cryptocurrency token with a constant value of one US dollar.

Stablecoins are not a new concept. Tether and USDC are two of the most popular in the industry, and they act essentially as banks: consumers send them money, and they receive stablecoins in exchange, which can be turned in for money at any time.

This “reserve-backed” concept has flaws, namely that you must trust the corporation behind the stablecoin to keep the money secure and immediately available, rather than putting it all on red in Las Vegas to make a fast profit with other people’s money.

The issue is that the mechanism only works if luna has any value. For a time, it did, due to a bold offer to pay a 20% return on funds kept in the currency.

And then, amid the meltdown, when investors began to withdraw their funds to cover losses elsewhere… It immediately stopped.

This sparked a “death spiral,” in which investors converted terra into luna, lowering the price of luna, which meant that the following redemption dropped the price of luna even further, and so on. The value of the luna coin dropped from $80 to about one-thousandth of a penny in a matter of weeks. The experiment had concluded.

Who Are The Winners And Losers?

On one level, the answer is straightforward: the winners are those who sold their cryptocurrency holdings in early April, and the losers are those who bought them.

It’s so widespread in the industry that there’s even a rallying cry for those left standing when the music stops: “HODL” (Hold On for Dear Life) – an implied guarantee that the boom times will return and only those who don’t panic and sell at the bottom will profit in the next part of the cycle.

There are, however, differences. Those who held blue-chip cryptocurrencies like bitcoin and Ethereum have only lost about half their value since the peak, whereas those who bought “shitcoins” – low-effort projects where almost everyone involved admits that the goal is simply to buy low, sell high, and leave someone else to pick up the pieces – have lost much more.

Similarly, people who were able to cash out into one of the stablecoins that survived the volatility are virtually as well off as those who were able to convert their crypto into cash.

Does This Mean The Underlying Technology Is Flawed Too?

Everything in the cryptocurrency industry is based on a few common ideas, most notably the notion of a blockchain – a decentralized ledger that monitors ownership of digital assets without giving any one person or organization control of the network.

Other common aspects include “proof of work,” a method of securing a blockchain by requiring massive amounts of energy to be burned every second to economically dissuade attackers from attempting to break the system, and the use of cryptographic “wallets,” which allow assets to be held in a way that prevents any transactions without the account holder’s secret key.

Each of these technologies has received criticism for its manner. Proof of work, for example, is responsible for the bitcoin network’s astounding carbon footprint, which is equivalent to the entire country of Thailand, while the blockchain itself functions as little more than a tremendously slow and inefficient database in any case where decentralization isn’t the primary benefit.

However, in particular cases, these technologies remain extremely strong. Any circumstance in which a government attempts to halt economic activity, for example, becomes far more difficult to enforce when there is no centralized entity to police the regulations.