Bearish markets have grown almost routinely for the prices of Bitcoin and other cryptocurrencies. Since its launch in 2009, the price of Bitcoin has fallen more than 50% six times.
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Coinbase CEO (COIN) Brian Armstrong, in a June 14 letter announcing an 18% staff cut, offered a guarantee despite the latest crack in Bitcoin and the impact of other cryptocurrencies. Armstrong said the cryptocurrency exchange “has survived four major cryptocurrency winters” and is taking the necessary steps to do so again.
However, this storm is on a completely different level. “It’s a cryptographic ice age,” Mizuho analyst Dan Dolev told IBD. “I think this will be very deep, very prolonged and many cryptocurrencies will not survive.”
The explosion of the so-called “stable currency” TerraUSD, removing $ 40 billion in market value, has accelerated a wave of deleveraging that has not yet followed its course. This month, cryptocurrency platform Celsius Network, which oversaw $ 20 billion in deposits and cryptocurrencies, halted withdrawals as it faced a liquidity crisis.
Both Terra, a network of blockchain payments and savings, and Celsius offered double-digit interest payments that depended on bullish cryptocurrencies. But the collapse of these wild west business models is less a cause than a symptom of the disintegration of cryptography. The real reason the cryptocurrency market is imploding: Bitcoin and the other approximately 19,000 digital currencies are facing their first hardening cycle of the Federal Reserve to curb an inflation outbreak.
Cryptocurrency prices fueled by easy money
For most of their existence, cryptocurrencies have enjoyed the most favorable monetary conditions. The period since the launch of Bitcoin has seen the Fed primarily trying to boost demand. During that time, the Fed bought $ 6.5 trillion in Treasury bonds and government-backed mortgage bonds. This suppressed rates in an attempt to encourage risk-taking, increase the value of assets, and stimulate demand through wealth gains.
Most of those $ 4.5 trillion Fed purchases came after the coronavirus blockade affected the economy in March 2020. Alongside several rounds of fiscal stimulus, the ultra-easy policy of the Fed worked too well. All this monetary fuel overfed the economic reopening triggered by the vaccine and caused the biggest inflation attack in 40 years.
Now, the Fed’s unprecedented stimulus investment is deflating most asset values. The increase in 10-year Treasury yields has especially affected growth stocks. Their future earnings flows are less valuable when they are discounted to the present based on a higher risk-free rate of return. This helps explain why the high-tech Nasdaq has outperformed the broad market.
But when it comes to valuing Bitcoin and other cryptocurrencies, there are no future cash flows to discount.
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Bitcoin Crash proves that there is no digital gold
The fall of Bitcoin has “disproved” the idea that it offers hedging against inflation, like digital gold, Deutsche Bank economists Marion Laboure and Galina Pozdnyakova wrote in May. Instead of trading like gold, the highs and lows of cryptocurrency prices have correlated with the Nasdaq to an “amazing” degree, they wrote.
However, the roller coaster of cryptocurrency makes the Nasdaq’s volatility seem tame. As of June 23, the Nasdaq has fallen nearly 31% from its November 22 intraday high. Bitcoin, which peaked on November 10, has fallen 70%.
Fed rate hike and other hardening moves
A few days before Bitcoin began its withdrawal, the Fed said it would cut $ 120 billion in monthly asset purchases. The timing doesn’t seem to be a coincidence. In fact, the history of Bitcoin’s peaks and valleys coincides primarily with changes in Fed asset purchases.
The first crack of Bitcoin began in June 2011, just as the Fed ended its second round of asset purchases in the era of the financial crisis. The second coincided with the spring 2013 rage over a possible reduction in the new round of asset purchases. The start of the real reduction in late 2013 coincided with the third crack of Bitcoin.
The fall in late 2017 coincided with Federal Reserve rate hikes that occurred when the Fed began to gently relax asset purchases. However, none of these cases saw anything like today’s hardening.
In late 2018, when monetary tightening helped trigger a fall in financial markets, the Fed’s key interest rate only reached 2.5% -2.75%. It was the highest in Bitcoin history. However, once the fall of the S&P 500 approached the 20% threshold of the bear market, Fed policymakers pointed to a change of course. In the fall of 2019, the Fed was lowering rates and buying more assets.
But last week, even though the S&P 500 and Nasdaq had already crossed bearish market territory, policymakers decided to speed up their tightening plans.
The Fed does not point to any specific asset class. However, eliminating $ 2 trillion for the cryptocurrency markets is all according to plan.
“We have seen financial conditions tighten and adequately,” Fed chief Jerome Powell said on June 15.
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The price of Bitcoin has crossed that line
In recent days, this fall in the price of Bitcoin crossed a line that previous bearish markets for cryptocurrency prices were not even approaching.
Bitcoin fell as much as 75% from the November record of $ 68,990.90 to the June 18 low of about $ 17,800. This briefly reduced its last major peak to nearly $ 19,600 in December 2017. At worst, in early 2015, Bitcoin’s low was almost 40% higher than the previous peak.
Since then, Bitcoin has bounced a little above $ 21,000. That’s about the average purchase price of $ 21,000, says Dolizu of Mizuho.
Eliminating Bitcoin gains over the past 4.5 years is challenging the idea that long-term holders can’t lose. This will test the faith that ultimately determines the value of all cryptocurrencies.
This faith probably has limits, but it is clear that it is deep. Nearly 50% of Bitcoin traders on Coinbase say they will not sell, no matter how low the prices of cryptocurrencies, Dolev wrote on May 19th. “For the remaining ~ 50%, the turning point is about $ 9,000,” a Mizuho survey found.
Despite the carnage of cryptocurrency prices, Silicon Valley venture capital firm Andreessen Horowitz announced a $ 4.5 billion cryptocurrency fund on May 25th. Venture companies invested $ 4.2 billion in early-stage cryptographic companies last month, a considerable sum, albeit below April’s 6.8 billion. In 2021, blockchain venture capital financing amounted to $ 33 billion.
The Killer application of cryptocurrency?
What have all these billions bought? The main emotion, if not the main purpose, of cryptocurrencies seems to be digital alchemy: to create money without code.
Without a doubt, creating nearly $ 3 trillion without code, then deleting $ 2 trillion, was an incredible feat.
NFTs, or non-consumable tokens, can be the closest thing to a killer application. The ownership of NFT is tracked in the same blog books that record the ownership of cryptocurrencies. Tokens can provide ownership of digital art, sports cards, music videos, and the like.
But these digital collectibles can have even weaker support than cryptocurrencies.
The digital rights to the first tweet were sold for $ 2.9 million in March 2021. When they were put up for auction a year later, the best bid was about $ 12,600.
The most expensive NFT sale in the last month was a digital print from the Bored Ape Yacht Club collection. Owning one of the 10,000 images has become a pseudosymbol of state. Club members include Jimmy Fallon and Justin Bieber.
However, Bored Apes ratings have fallen. The minimum price, the current lowest auction price for a portion of the collection, has fallen 77% since the May 1 peak of $ 420,000, to about $ 97,250.
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Cryptographic payment functionality was revised after the fall of Bitcoin
What separates Bitcoin and most other cryptocurrencies from being mere collectibles is their usefulness for making transactions.
Progress on this front has been slow. In 2014, Stripe was the first large payment company to support Bitcoin transactions. In 2018, it had cut this support, citing slow transaction times, high commissions and little customer interest.
Four years later, Stripe has revived its Bitcoin ties, while some crypto players are earning praise for the efficiency of transactions.
In April, Morgan Stanley promoted Bitcoin’s Lightning network as more convenient for retailers than debit cards for small purchases. The secondary network allows fast and low-cost transactions between parties outside the network.
These transactions do not require slow, costly, energy-intensive work test calculations of Bitcoin to upgrade the blockchain ledger. The Lightning network works more like Visa (V) and Mastercard (MA), allowing the settlement of funds once the transaction is completed.
Ethereum is preparing to switch its entire network to the same type of fast transactions as lightning, while reducing power consumption by 99%.
In April, Lightning Labs, the team behind Bitcoin’s Lightning network, announced $ 70 million in funding. His new big project is to allow the network to manage transactions using stable currencies backed by fiat currencies like the dollar.
However, if paying with stable currencies of $ 1 makes more sense than using Bitcoin, why should Bitcoin be valued at $ 20,000 or more?
“I am a big believer in blockchain technology and smart contracts and decentralized finance,” Dolev said, citing the potential to reduce the cost of transmitting money globally. “But I make a big distinction between all that stuff and the hype around coins.”
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Stablecoin cryptocurrency price test
Stable currencies have been the biggest winners and losers of the latest cryptocurrency crack. Tether and USD Coin, now the third and fourth largest cryptocurrency by market capitalization, have maintained essentially 100% of their value.
The value of the currencies is backed by an equal amount of extremely safe assets such as US government cash and debt. Tether also has a highly rated short-term trade debt. In the midst of the crisis, they have had liquid cash in …