Crypto Crash of 2022
The cryptocurrency world goes through another shakedown, so what are the lessons to be learnt from this?
Source: JFunk via Shutterstock
Crypto has always been a continuous conversation. On one side, the entire basis of the digital currency options was to create a financial system away from the banks and politics, a system that floated on its own and created globalisation of the kind never seen before. On the other, crypto opened the doors to financial options beyond regulations or accountability, becoming a monetary exchange for the dark web and all the transactions that came along with it. All in all, cryptocurrency promised riches and benefits for the common people, a chance to ‘mine’ for the figurative gold of the digital age.
"I have said all along the crypto assets are highly speculative, very risky assets," Lagarde told Dutch television show College Tour in an interview aired on Sunday. "My very humble assessment is that it is worth nothing. It is based on nothing, there is no underlying assets to act as an anchor of safety.”
Yet, the fact that the President of the Central Bank of the European Union has shown very clear disdain for the existing system of cryptocurrency begs consideration, and on top of this, the statement comes to light very soon after one of the largest blows to the crypto economy in history.
As of the 12th of May, Bitcoin (BTC) has lost 40% of its value, down to around USD30,000 per coin, alongside two other currencies Ethereum (ETH) and Finance Coin (BNB), both of which lost 48% within the same time. Based on the market control, these three are the largest and most sought after currencies, and their hamstringing can be credited to the immense failure of another, similar, yet smaller scale currency, Luna.
History
Created in 2018 by Do Kwon, a South Korean Stanford graduate, Luna, and its sister currency, TerraUSD, were hailed as a game-changer. The basis was that Luna was to be tied to a ‘stablecoin’ known as TerraUSD, both created by Kwon’s company Terraform Labs, and this was supposedly the strength of the currencies. A ‘stablecoin’ means what the name says; a digital currency that stays at the same value by being tied to another asset.
Other stablecoins are tied to existing currencies or fixed assets, yet TerraUSD decided not to play along with this. Instead, the value for TerraUSD was tied to ‘an algorithm that linked its value’ to Luna. Kwon’s intention was to use the two related coins as the basis for more elaborate borrowing and lending projects in decentralised finance, a system that is still yet to prove its value. If this was not enough of a red flag, then there’s more.
Terraform Labs was supported by many investment firms, such as Lightspeed Venture Partners and Galaxy Digital, raising over USD200 million to fund the crypto project. This caused the total value of Luna to balloon to more than USD40 billion, which, as is the story with crypto traders, caused quite the feeding frenzy. Within the next two years, investors pushed the price of Luna from USD1 to USD116 by early 2021, creating millionaires out of these investors.
The decision made to tie down TerraUSD with Luna was constantly criticised, yet Kwon kept firing back with ‘trash talk’ akin to what one would hear on online games. His attitude had played a part in increasing the number of small-time investors pouring their entire life savings into the currency in hopes of multiplying it in value, yet as with modern-day investing, the benefits are reaped when one knows when to sell off and cash the cheque. In this case, it was snatched up by the largest investors, and that was what caused the collapse.
The downfall
At the onset, multiple respected financiers backed this highly speculative financial product and then sold their coins early, raking in substantial profits. In this category is Pantera Capital, a hedge fund that feeds on such risky investments to increase its capital.
They had made a 100% profit on their initial investments by selling off 80% of their holdings on Luna. They turned USD1.7 million into roughly USD170 million as they checked out, and they expressed sympathy for the investors who suffered in the crash. The crash was “unfortunate,” an investor at the firm, Paul Veradittakit said. “A lot of retail investors have lost money. I’m sure a lot of institutional investors have, too.”
Kathleen Breitman, one of the founders of the crypto platform Tezos, fired back, claiming that the crash of Luna and TerraUSD was driven by the irresponsible behaviour of institutions such as Pantera that was backing Kwon. “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she said. Now, she added, “they’re trying to console people who are seeing their life savings slip out from underneath them. There’s no defence for that.”
Changpeng Zhao, CEO of the crypto exchange Binance, said his firm had bought $3 million of Luna, which grew to a peak value of $1.6 billion. Binance, however, never sold its tokens, and now their Luna holdings are currently worth less than $3,000, yet this causes the no worry, being a company whose U.S. arm is valued at $4.5 billion.
While the sentiment amongst crypto builders is that the feast and famine mentality is what drives them and attracts them to the community. The regular traders are those that have felt the blow the hardest. A Reddit forum for evangelists of Luna has been seeing users share lists of suicide hotlines for the people who’d poured their life savings into these currencies, invoking a much darker conversation of who really needs to be held accountable for such an unaccountable economy.
The key takeaways
Cryptocurrency is not the promised boon that it was hailed to be in the beginning. It is more volatile and tied to existing systems than people would like to admit, an entire topic to be explored later, and the environmental effect of crypto mining alone is cause for extreme concern. The crypto market has seen over USD300 million simply vaporise, being entirely driven by speculation rather than any physical asset in most cases. While those who argue for crypto claim that even gold, which most currencies are based on, is a speculative value, the crypto market is a lot more volatile, a lot more critical to even tweets and social media posts by influential people.
Whether or not there’s a middle ground, of regulation or systemic control, is yet to be seen, but until then, the future is murky. The riskiness of the business motivates the thrill-seekers, and the moves of behemoth finance corporations may as well decide the outcome.
