Over the past week, crypto investors have seen the value of their investments decline substantially as many cryptocurrencies went into free fall. Pundits estimate that just about anyone that invested in crypto from late last year and has yet to sell their stock is facing a serious loss in value. Bitcoin, the world’s largest cryptocurrency, reached an all-time high value of $69,000 in November 2021 and by last week Thursday, had dropped to $25,401. The decline is believed to have erased over $1trillion in asset value from the world’s cryptocurrency markets.
Canadian fintech scholar, Ryan Clements, is among those that earlier warned of this potential to fail and that people investing in cryptocurrencies may not be aware of what they were getting themselves into. He termed cryptocurrencies as risk assets not stable assets or stores of value.
Even the so-called ‘stablecoins’ have proven unreliable as the likes of TerraUSD that was pegged on the dollar collapsed, and with it, confidence in its native coin, LUNA. The Terra blockchain, Terraform, has already been frozen following a plummet in value to as low as 23 cents as its founder scrambles to formulate a recovery plan. This collapse of Terra is what may have provoked the recent decline in the cryptocurrency markets and sell-off that saw a massive inflow of about 6,900 bitcoins into the Canadian-based Bitcoin Purpose ETF on May 12.
There is also concern that the tribulations of the cryptocurrency market may impact traditional markets that trade in stocks and bonds. More so for listed companies that have invested in crypto, like Coinbase, which saw the value of its conventional market share decline by almost half last week. Clements noted that as people sell off their crypto stocks to salvage their investments, this could cascade into more selling off across other assets, leading to systemic risk. He added that the catastrophic failure of Terra could have contributed to the larger crypto sell-off.
Further declines are likely to result in forced sales for investors who may have borrowed to buy. Clements expressed some concern that many cryptos may fall to zero value or even prove to be frauds. There are an estimated over 10,000 active cryptocurrencies with a further over 8,000 that are considered dead cryptos.
Clements added that as cryptos continue to fall to new lows, now was a good time to reassess their purpose and value. He considers this a good opportunity to find out the true utility of blockchain, beyond just speculative trading.
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