Cryptocurrency market lost $260 billion in two days and could suffer another setback

In the last 48 hours, according to estimates by website CoinMarketCap, the market has lost about $260 billion after a massive asset sale. According to analysts, there is still room for further declines, and the recovery may depend on the United States controlling inflation in the country.

Rich people who have seen their fortunes fatten with the cryptocurrency fever in recent years have lost billions of dollars in a few weeks.

Coinbase Global founder Brian Armstrong, for example, had a personal fortune of $13.7 billion as of November 2021, and has seen his net worth shrink to $2.2 billion, according to the Bloomberg Billionaires Index.

Another enthusiast, Michael Novogratz, CEO of cryptocurrency bank Galaxy Digital, has seen his fortune plummet to $2.5 billion from $8.5 billion six months ago.

The trigger for the series sales was the collapse of TerraUSD, a digital currency anchored to the dollar and, therefore, classified as a stablecoin, which is a type of virtual asset with the aim of maintaining a more stable value over time.

Despite having been developed to maintain parity with the dollar, so that a unit of TerraUSD was equivalent to US$ 1, the cryptocurrency suffered speculative attack and even dropped to US$ 0.2250, generating pressure on other assets.

What is?

It is a virtual currency, considered a “cryptocurrency”, given the use of such complex software protocols. It is web-based and not managed by any central bank, relying on thousands of computers worldwide that validate transactions and add new bitcoins to the system. Thus, there are no banks intermediating the transactions.

Who invented?

Under the alias Satoshi Nakamoto, this unidentified internet user created bitcoin in 2008 before it was made available on the network in 2009. It took years of trying to identify Satoshi, until in 2016 Australian businessman Craig Wright revealed himself to be the coin’s creator .

What is it for?

The currency’s value lies in its freedom from government control and bank fees, plus the chained network needed to verify transactions. Bitcoin is recognized as a tool for anonymous and private transactions. In addition, international payments become easier and cheaper as there is no connection with the regulator.

Has value?

Yes. In early 2017, the value of a bitcoin surpassed US$ 1,000 for the first time and marked a strong appreciation in the year. In August, it crossed $4,000 amid optimism that faster transactions would accelerate the currency’s spread. Changes in China, however, have brought down the price.

where to store

Bitcoins are stored in a “digital wallet”, located either in the cloud or on a user’s computer. It works like a virtual bank account that allows users to transfer currency, make payments and save money.

Anonymity

Although each transaction is publicly recorded, the identities of those involved are never revealed, only the wallet identification number. This keeps transactions private and allows for trading without leaving a trace. Therefore, it is the currency of choice for anyone who buys drugs or other illicit activities on the internet.

Investors who invested money in other cryptocurrencies were afraid that the same would happen with their applications. In this way, they sold the assets to try to redeem the profit that was still left and not have a loss, which, consequently, led to a devaluation of several currencies.

In addition, those responsible for maintaining the balance of TerraUSD sold part of their reserves in Bitcoin and in another cryptocurrency called Avalanche to ensure parity, which made the charts magnify the losses.

Luiz Pedro Andrade, crypto asset analyst at Nord Research, believes that the biggest problem was caused by the pairing not being done in dollars, but in Luna, another digital asset.

Using this token would smooth out any short-term fluctuations. However, the value of the TerraUSD stablecoin depends on investors’ confidence in Luna’s value. And Luna’s value is based on confidence that TerraUSD remains stable.

— The Luna foundation has a very large bitcoin position. They have already sold a part and must sell the rest. They’ve already assumed that it won’t work anymore. This can cause new sales pressures — Andrade opines: — Whoever bought bitcoin in the last two years is still in profit and may want to sell now to keep the money in cash. There’s plenty of room for that coin to drop yet.

Another factor that has led to the devaluation of cryptos is the positioning of the Federal Reserve, the American Central Bank, in favor of new interest rate hikes to contain inflation. As digital currencies are very high-risk assets, many investors are rushing to safer fixed income.

Victor Rosa, an analyst at Kínitro Capital, says the market is at a difficult time, with several assets falling by up to 40%, which intensified investor fear. For him, an upward cycle should only happen when interest rates come back down and inflation is under control.

— Cryptocurrencies are narratives, they are non-cash-producing currencies, the highest risk investments. With the economy slowing, price levels well crumpled, I see no reason for this trend to reverse. The only way is for inflation to subside — he ponders.

In the early hours of Wednesday to Thursday, the minimum price of Bitcoin hit R$130,514.92, the lowest value since December 2020. In dollars, at 8:30 pm yesterday, the currency was quoted at US$28,992.52. Coinext founder José Artur Ribeiro explains that many investors had scheduled sell orders for $30,000.

That is, if the currency dropped to an even lower level, the platform would automatically sell the assets to save more significant losses.

The numerous sales also helped to impact the asset’s price. Ribeiro calculates that the next level is US$ 27,000. The market fear, however, is that the currency will reach US$ 21,000.

In that case, the company that holds the most bitcoins, MicroStrategy, with almost 130 units, would have to sell 25% of its portfolio under a contractual clause. This would put even greater pressure on the asset’s value.

— These bitcoins were acquired via debt. There is a rule that if the price drops by 40%, the company needs to liquidate its position. It may be that, with this, other companies make the same move, for example Tesla, which bought more than 43 units when bitcoin was at the level of US$34,700 – he analyzes.

The phenomenon makes even more latent the need for market regulation in order to protect investors. Cryptocurrency expert Diego Velasques suggests that the more companies and countries that enter this system, the faster the world will accelerate the regulatory process.

Source: The Globe