It’s no secret the cryptocurrency market has been an interesting environment for traders and investors for some time now. For years, many have been discussing this landscape as a hedge alternative to traditional forex and stock purchases. What’s more, the rise of concepts like Web 3 and decentralization have increased interest significantly. If you had invested a $100 in Luna (one of many cryptocurrencies) a month ago, you’d probably be confident you were making a safe bet in an evolving environment. However, the value of this coin has fallen drastically, making $100 worth less than 5 cents. There are plenty of other examples of cryptocurrencies experiencing the same sudden crash. In a week, a range of alt-coins dropped in value by 30%. While many recovered to an extent, there was still a seven-day loss of more than $500 million.
What’s Happening to the Cryptocurrency Market?
The important thing to note is the changes in the current market don’t necessarily indicate bitcoin trading, or any other form of cryptocurrency trading is no longer a good idea. Analysts suggest the crash was triggered by a financial attack on Terra, which is intended to match the U.S. dollar, but is now trading at closer to 18 cents. These kinds of attacks are complex, as they involve placing multiple trades in the crypto space, with a focus on triggering specific effects. In this case, Terra fell significantly in value, bringing partner Luna down with it. This caused a panic in the crypto space, with many withdrawing rapidly from a range of stable coin investments.
Many stable coins are reliant on perception of and confidence in the market. Once a worrying event occurs, big falls can start happening quickly. Recent major falls have even called into question the stability of these coin types, which are designed to minimize volatility as much as possible. The effects seen recently have spilled over into the entire crypto space too, creating single day losses similar to a Black Wednesday for the market. Even Tether lost its peg in the market, reducing to 95 cents per dollar. Some analysts believe this could indicate a need for further regulation.
Changes to Crypto Confidence
How investors choose to respond to this complex landscape will be crucial in changing the future of cryptocurrencies. We’ve already seen an increase in despair and panic throughout the landscape, with some companies comparing the crash to a traditional bank run. However, customers tend to be more worried with bank runs that their bank can’t give them any cash, rather than being concerned that cash no longer has worth. More accurately, the situation is similar to stock market crashes where the shares an investor holds may lose its worth. Just like with stocks, there’s a basic assumption among crypto investors that the price of their asset will increase. If the asset price does begin to rise, investors can even consider putting more cash into the purchase, planning for inevitable gains.
Many will have invested in crypto with the belief it would make them richer. However, this belief has certainly been shaken as of late. Of course, people don’t only invest based on confidence. Many believe in the transformational nature of cryptocurrency. Now, more than ever, many suggest these currencies will eventually replace traditional cash in a more digital future. These investors see an increase in value for their crypto as a demonstration of increased power in the landscape, but they also don’t necessarily see a decline in value as a monetary loss as much as an ideological one. This ideological stance also makes investors less likely to sell.
In standard stock market environments, when a crash occurs, we discuss the potential return to fundamental value for that asset. However, crypto’s fundamental value is assumed to be zero. Of course, it’s worth noting there is some value based on belief and confidence. The size of an investor pool who own the coin believe in its future, and therefore may determine its value overall. Looking at investors in crypto as different groups to stock and forex traders, with different motivations makes it easier to see the reasoning behind the behaviors in the market. Right now, some investors are taking solace in the likelihood that the worst of the crash is over, and better times might be ahead. Of course, nothing is ever guaranteed. For any investor, this may be an opportunity to extend crypto purchases, but it could also be an insight into the importance of diversification for maintaining the stability of a long-term portfolio.