The Flowery Universe of Virtual Currencies Experiencing Anthological Spring Pruning. Bitcoin is down 35% in 2022, Ethereum is down 44%, Cardano is down 58%… And these are the strongest currencies. Other smaller ones like Fantom or Terra USD have lost over 80% of their value. The (irrational) exuberance with which this garden grew prompted a purge.. Now, how many of these cryptocurrencies will survive? Was there overgrowth?
The governor of the Bank of Spain, Pablo Hernandez de Cos, released on Thursday during a financial conference the outrageous numbers in the world of digital assets. “Five years ago, the total value of this market was $16 billion, and by the end of 2021, it will be worth almost $3 trillion.“. In other words, it has increased almost 200 times. Kos again insisted that the financial history indicated that in the face of such a meteoric rise in the unregulated asset, the authorities needed to take action.
The big virtual money boom started relatively recently. While the first cryptocurrency, bitcoin, has been around since 2010, millions of people only joined the trend after the pandemic hit. From March 2020 (when half of humanity was imprisoned) to August of the same year, the price of bitcoin increased 8 times..
This rapid revaluation has attracted a legion of new investors, especially young ones, to dare to tackle this new wave of crypto assets. But the virtual money craze has not remained among the legion of computer-savvy and tech-savvy millennials who got to it first. The launch of new virtual currencies and tokens has been accompanied by the development of an entirely new industry: computer farms in Canada meant to be rented out to bitcoin “miners” seeking to decrypt new currencies; intermediary platforms such as Coinbase, which went public with a guarantee of hundreds of millions of dollars in fees; venture capital funds registered in Luxembourg, Gibraltar or Malta that have sought to institutionalize investments to reach a wider public…
What happened to stablecoins?
Concept. So-called “stable currencies” are cryptocurrencies designed to minimize the volatility of their prices relative to a “stable” asset or basket of assets. They are usually pegged to common currencies such as the dollar. Ensuring this parity allowed them to transfer trust between users so that they could be used for various functions. One of them is to serve as collateral for investors interested in speculating with other cryptocurrencies.
Earth. The big problem with stablecoins is that this parity guarantee is only backed by the algorithm and not by the actual purchase of assets. So, when there is a moment of distrust and everyone starts selling, there is no way to meet the promised conversion rate. This is exactly what happened to the Terra USD coin on Thursday, which rose from $0.995 last Monday (almost perfect parity) to $0.16 on Friday.
leash. Terra USD was not a widely used stablecoin, but its problems have spread to other more well-known stablecoins such as Tether. There was a moment in Thursday’s session when its value fell 5%.
money in buckets
As more and more investors came in, the major companies in the sector increased their advertising budgets. Spanish firm Bit2Me rolled out a very strong publicity campaign in March 2021 in major Spanish cities… while the Bank of Spain and the government issued notices reminding the public that cryptocurrencies are an unregulated and risky asset.
European and North American regulators have been searching for two years for a way to regulate this turbulent universe. The European Commission wants a new crypto asset directive to come into effect in 2024, and in the US, several senators are pushing for specific regulation for stablecoins.
Wall Street giants have also been blinded by the glare of virtual money.. Bank of America has fallen in love with digital assets. “We believe that they will become another new class of financial assets,” similar to the stock market or bonds. Fund manager Fidelity has set up a task force to advance regulation of cryptoassets, and Goldman Sachs is in talks for a loan with Coinbase backed by bitcoin.
Was there a bubble?
The collapse of e-currencies in recent months was triggered by the US central bank. The Federal Reserve was forced to raise interest rates to contain runaway price increases. The end of easy money has caused massive falls in the stock market as well as crypto assets.
Joaquin Casasus is the partner and CEO of Abante Asesore. The financier explains that in recent months, it has been possible to make sure that bitcoin has not fulfilled some of the promises brandished by its defenders. “It’s not a safe-haven asset, it doesn’t allow you to break away from the stock market, and it doesn’t protect you in a very high inflation environment.”
Now, his opinion on whether there was a bubble in crypto assets is more nuanced. “There was something like a bubble, but it cannot be compared to historical bubbles like tulips or dot-com companies. This is behind decentralized processing technology, “blockchain”, which can add value. It remains to be seen which virtual currencies and projects will ultimately survive.”
Victor Alvargonzalez, founding partner of Nexstep, shows himself to be a great advocate for the technology behind cryptoassets, the blockchain. “I think these fixes will benefit this industry by separating the wheat from the chaff. The idea behind this seems brilliant to me and could be useful, but there have been too many inexperienced users and too much speculation.”
One of the greatest experts in Spain on fiat money and cryptocurrencies. Emeritus Quintana, Advisor at Numantia Patrimonio Investment Fund. In his opinion, the corrections that have occurred are completely normal for a relatively new asset. “You have to take into account that more than 65% of bitcoins have not changed hands in the last year, which is a record high. Which indicates that much of the volatility is being generated by new players who have entered here with a purely short-term and speculative vision.”
His fund cannot directly invest in bitcoin as it is unregulated, but it does so indirectly through a US-based company, Microstrategy, which invests almost all of its cash into buying bitcoin. The firm spent nearly $4 billion at an average price of $30,000 per bitcoin (current market price).
Buying shares of Microstrategy has become a workaround for entering cryptocurrencies. Of course, its future was entirely in bitcoin and its price dropped by 70% in a year.
Another formula is buying exchange-traded funds (ETFs) pegged to cryptocurrencies. This figure is accepted in countries such as Germany, Sweden and Switzerland. Instead, the United States has been debating for months whether to make such a decision. “I think they will eventually have to do it,” Quintana says.
Apart from companies and exchange-traded funds, there are even countries betting big on bitcoin. This is the case Savior, which has been accepting the asset as legal tender since 2021 and allocating a portion of its budget to buying bitcoins. The recent crash has put her public accounts at risk. Too much volatility for what has so far been considered nothing more than a speculative asset with little use in the real economy.
Faced with the development of blockchain technology and crypto assets, several countries are exploring ways to launch their own digital currencies. Ignacio Cantos, chief investment officer at atl Capital, understands that these developments also partly explain the crash of recent months. “A currency without central bank backing is harder to succeed. When you invest in crypto assets, you often do not understand what is behind it. I believe that many projects will eventually disappear,” he argues.
Ignacio de la Torre, chief economist at Arcano Partners, is of the same opinion. “Cryptocurrencies were sold as an alternative currency, but they ended up becoming a highly speculative asset. There were many players who ended up taking advantage of the legal vacuum in this area and went to regulatory arbitration.”
Although there was already a definite rebound on Friday, no expert dares to speculate how long the deep cleaning of cryptoassets will last. However, everyone agrees that the strongest projects that create the most value will win.
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