On June 14, 2022, Bitcoin, the most vital asset in the crypto world, started trading around the $17,700 mark for the first time in several years. It’s important to note that in November 2021, it was trading at an all-time high of $69,000. And as of June 22, the currency is struggling to stay above the $20,000 mark.
During the epic bull run of 2021, the market sang like a choir about how BTC will finally cross the $100,000 mark. Half a year later, the most trending phase on Twitter and Reddit is ‘Bitcoin is Dead.’
As American baseball player and manager Yogi Berra once said, “The future ain’t what it used to be.” In times of uncertainty, is it better to turn your back on blockchain technology and its assets, or is it another opportunity masquerading as a crisis?
The root of the problem
The recent crashes have experts drawing parallels to the last crypto winter in 2018. Cryptocurrency Entrepreneurs like Julian Hosps had warned of bitcoin hitting the $60,000 mark and slipping to the $5000 mark. Though that prophecy was only half true, 2018 was a difficult time for crypto enthusiasts.
Hosps had compared the 2018 crash to the dotcom bubble, which eroded billions from the market two decades prior. He believed that many crypto coins that were hyped and did not deliver would be scrapped, and those that provided value and had new technology would come to the front.
However, even after the crash, meme coins or crappy coins like Doge and Shiba Inu gained popularity through tweets from billionaires like Elon Musk and other influencers. People continued to invest in get-rich-quick schemes without understanding the technology and potential behind each product.
The crash of June 20220 got so severe that Celsius, a decentralized finance and crypto bank, announced on a company blog post, “We are taking this necessary actions to stabilize liquidity and operations while we take steps to preserve and protect assets. Furthermore, customers will continue to accrue rewards during the pause in line with our commitment to our customers.”
The Trouble at Terraforma Labs
Two such coins of immense notoriety partially responsible for the 2022 crash are Terra Luna and Terra USD. They were founded by Do Kwon and Daniel Shin of Terraforma labs, specializing in creating stable coins pegged to the US dollar, Euro, and the South Korean Won.
Stable coins are cryptocurrencies built to have a fixed value, in contrast to volatile coins like Ethereum and Bitcoin. Terra’s stable coin TerraUSD (UST), unlike its peer Tether (USDT), isn’t backed by fiat currencies. TerraUSD used its sister currency, Terra Luna, instead of fiat and ran on algorithms to maintain its $1 US peg.
Do Kwon, a trash-talking Stanford graduate from South Korea started Terraforma labs in 2018. He even called those who invested in Luna “lunatics.” Brad Nickel of the cryptocurrency podcast “Mission: Defi” described Kwon as bombastic, arrogant, and a cult personality that sucks people in.
Do Kwon’s persona and social media presence was so strong that investors, including Arrington Capital and Coinbase Ventures, pooled in more than $200 million between 2018-2021, according to fund tracker PitchBook.
Luna’s prices peaked at $116 in April 2021 from a mere $1 in early 2021, creating a generation of crypto millionaires. The crypto CEO even named his daughter Luna.
Kwon’s crypto empire fell when TerraUSD joined a pool of stable coins called 3pool, where an alleged attacker found vulnerabilities in the Terra ecosystem.
The attacker created an imbalance in the supply of Luna, which deflated its value and dragged down the UST with it. The price of Luna fell close to zero. And the UST, which was to be pegged at $1, was valued at around 11 cents in late April.
Many investors in Terraforma Labs lost money, including Changpeng Zhao, CEO of crypto exchange Binance. Changpeng had bought $3 million of Luna, which became $1.6 billion at its peak. Binance held onto its Terra assets. Their entire Terra holdings are worth about $3,000 as of May.
The collapse of Terraforma Labs created a destructive ripple through the crypto market. Luna, which had ballooned to $40 billion, saw most of those assets wiped out overnight. The cryptocurrency market lost $300 billion in the same week that Luna collapsed.
Investors have begun to be wary of other stable coins such as Tether (USDT) and Dai, creating paranoia about cryptocurrencies in general. Tether was too big to fail, but after the collapse of UST, people are beginning to think anything is possible. Even the fall of stable coins.
Also, the alleged attacker who dragged Luna and UST to the ground has many crypto enthusiasts reexamined the safety of cryptocurrencies and other blockchain technologies. They are now worried about hackers.
There were rumors of Do Kwon cashing out before the crash. He responded in a tweet on June 12, “This should be obvious, but the claim that I cashed out $2.7B from anything is categorically false. I didn’t say much because I don’t want to seem like a victim, but I lost most of what I had in the crash too.”
Covid-19, Ukrainian war, and supply chain disruptions
The economy suffered since late 2019, when a little-known illness from Wuhan, China, became a full-blown pandemic.
The pandemic was followed by worldwide lockdowns creating supply chain disruptions and contracting economies. However, during the lockdowns, bitcoin, which cost around $7,300, rose to more than $46,800, an astounding 640% rise.
Cryptocurrencies proved to be a very robust technology that could find use in times of global crisis. These assets had no potential liquidity constraints and could bypass local governments when trading halted during lockdowns.
Hadar Y Jabotinsky, a research fellow at Tel Aviv University Law School, and Roee Sarel, a post-doctoral research associate at the Institute of Law & Economics at the University of Hamburg, co-wrote a paper.
In the study, “How crisis affects crypto: Coronavirus as a test case,” the researchers discovered a correlation between the volume of the top 100 cryptocurrencies and the number of covid-19 cases and deaths worldwide.
Cryptocurrencies did exceptionally well during a time of an unprecedented crisis, but once the situation was stabilized, they began trailing traditional markets as before. Hadar & Roee also suspect that the initial meteoric rise might also be due to many pump & dump schemes (scams) that the crypto markets were muddled with at that time.
The currencies proved to be a storehouse of wealth during a crisis. They found other uses when coins were sent to governments and NGOs, fighting the Covid waves. One example is Ethereum cofounder Vitalik Buterin funneling $ 1.6 billion worth of Shiba Inu and other meme coins into the Indian crypto relief wallet during a devastating second wave that ravaged the country.
Crypto found the same uses during the Russian invasion of Ukraine as well. Many sympathetic to the Ukrainian cause sent currencies and NFTs to the country’s official digital wallet. Alex Bornyakov, Ukraine’s deputy minister for digital transformation, wrote on the nation’s donation website that cryptocurrency played a significant role in Ukraine’s defenses.
By June 2022, the war-torn country had received approximately $100 million in cryptocurrencies for defense and humanitarian causes. One of the most expensive NFTs in the world, Cryptopunks was also given to Ukraine, by an anonymous donor. The digital artwork was sold for $100k, to aid in the war effort.
Vice prime minister and minister of digital transformations Mykhailo Fedorov tweeted, “A few months ago someone donated #CryptoPunk #5364 for @_AidForUkraine and now we sold it for 90 ETH/ over $100K. Just wanted to thank the crypto community for such generous donations. With your help we are able to support our defenders.”
But that’s not all, Ukraine has been using the underlying technology behind cryptocurrency (blockchain) to create permanent records of land registries, titles, births, and other official documents.
It’s hard to rebuild a country without permanent records. Haiti, for example, had an extraordinarily difficult time rebuilding after an earthquake destroyed 60 years of the country’s archives.
Ukraine is also using blockchain technology to document war crimes. Files on the blockchain cannot be tampered with or destroyed. Ukraine is using this tech to store immutable authenticated images of Russian crimes that could be later used in an international court or be passed down to the coming generations. So far, over 10 million conflict-related images have been stored as NFTs in the archives of a popular start-up called Arweave.
At the same time in Moscow, Russians scrambled to buy cryptocurrencies when the Ruble came crashing after Western sanctions. Since the beginning of the war in February, spending on bitcoin using rubles has increased 260%.
The situation was so bad that US senator Elizabeth Warren introduced a bill in Congress to stymie Russian crypto transactions.
Most of the Ruble converted into bitcoin is from average Russians trying to hold onto their life savings.
However, senator Warren believes Russian oligarchs are evading sanctions imposed on them by the West using cryptocurrencies.
“Russia has had a lot of time to think about this specific consequence,” said a former federal prosecutor Michael Parker, who now heads the anti-money-laundering and sanctions practice at the Washington law firm Ferrari & Associates. “It would be naïve to think that they haven’t gamed out exactly this scenario.”
Illegal funds are flowing into Russia through a dark web marketplace called Hydra, which is powered by cryptocurrency and handled more than $1 billion in sales in 2020, according to Chainalysis. “We know that there’s no questions asked, and we know that Hydra operates not just throughout Eastern Europe but throughout Western Europe,” said Kim Grauer, director of research at Chainalysis. “There’s definitely cross-border business happening.”
The Russian government has introduced a bill in its parliament which bans crypto for small traders and citizens while allowing government institutions and big banks to make international payments using cryptocurrencies. Anatoly Aksakov, the head of the financial markets committee of the Russian lower chamber (State Duma), issued a bill seeking a ban on digital assets as a legal payment method. It has been opposed by many in Russia seeking more widespread adoption of new technologies.
Irrespective of the results of the ongoing conflict, both Russia and Ukraine have been forced to adopt blockchain technologies and integrate them into their everyday lives.
Another event that contributed to the economic catastrophe has been China’s zero covid policy and its start-stop economy. The 26 million residents in Shanghai were confined to their houses for two months due to China’s zero covid policy. Today more than 200 million Chinese live under some pandemic restrictions, and their economy is paying the price. Retail sales in April in the country were 11% lower than the previous year. Housing sales in China fell 47% compared to 2021. This economic slump in the “world’s factory” has created a supply shortage everywhere. The global economy has slowed down, and so have stock markets and crypto.
Printing money, distributing stimulus cheques, and hiking interest rates.
The crypto market has seen $4 trillion wiped out from the market and shrink 87% in the recent collapse. It’s difficult to explain how we got here without mentioning the Federal Reserve.
When the global economy went south, the US government and the Federal Reserve did everything they could to save businesses and households. The monetary policy they adopted was called ‘Quantitative easing.’ In just three-and-a half-month in 2020, the Fed printed over $3 trillion to offset the economic effects of covid-19. The money printed was then used to buy bonds from financial institutions.
During the Trump era, the US government also transferred $2.2 trillion directly to the accounts of Americans using the CARES Act. The size and scope of the stimulus cheque took a toll on government spending and expenditure. The act was the largest economic stimulus package in history.
A sizable chunk of expendable money Americans received through the CARES act was spent on consumption and as investments in stocks and crypto. As a result, in 2021, crypto saw an amazing bull run with bitcoin hitting an all-time high of $69,000.
Despite warnings from economists about the consequences of printing money, the Fed and the US government insisted that the US could print the dollar without consequences. By February 2022, inflation hit a 40-year high with no respite. The Biden administration said that inflation is transitory, but almost six months later, it has become evident that inflation is here to stay.
The Fed chair Jerome Powell hiked interest rates by 75 basis points in May and in June, with further hikes expected in the meeting in July. The higher interest rates have made borrowings more expensive and are likely to make investors risk-averse and stay away from highly volatile assets like crypto.
Massacheusets senator Elizabeth Warren tweeted her interaction with the Fed Chair, “Will interest rate hikes lower gas prices? Nope. Lower grocery prices? Nope. Break up monopolies, stop COVID, or roll back Putin’s tanks? Nope. They won’t tackle the main drivers of inflation—but they could get a lot of people fired & make families poorer.”
During a Senate banking committee meeting she told Powell, “You know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work. I hope you consider that before you drive this economy off a cliff.”
The billionaire CEO of crypto exchange FTX Sam Bankman-Fried blamed the Fed for the Bitcoin crash. He said, “People with money are scared. Markets are scared.”
The cryptocurrency market has never braved a global recession before. It is uncharted territory for the new technology.
Between prophets of doom and unhinged optimists
Billionaire and founder of Microsoft is a critic of the crypto market and is not involved with any such coin or non-fungible token. Bill Gates has often predicted the collapse of bitcoin and has said that the whole market runs on “100% based on greater fool theory,” which is the idea that prices of overvalued assets will continue to rise as long as there are “greater fools” willing to buy them.
There have been bitcoin skeptics calling on the doom of the currency since early 2010. The Underground Economist wrote an article explaining why Bitcoin can’t be a currency. In August 2013, Timothy Laven from Bloomberg View wrote an article about how “Bitcoin is doomed.” The coin price rose soon after the article was published from $94.78 to $572 in three months. Timothy wrote a subsequent article in November 2013 titled, “Bitcoin is still doomed.”
Bitcoin has had many cycles of booms and busts, and so have other currencies in the market. It has surprised critics every time. But the technology is young and merely a decade old, and it has not weathered a global financial crisis of this magnitude before.
The Bank of International settlements, in a 42-page chapter of its annual economic report, said it envisioned Central Bank Digital Currencies (CBDCs) to find use in the global monetary system. Hyun Song Shin, economic adviser and head of research at BIS, said that anything crypto could do, CBDS can do better. The BIS believes that crypto’s structural flaws make it an unsuitable basis for a monetary system.
BIS commented on the Terra crash and the risks of buying stablecoins in a tweet, “The implosion of #TerraUSD and others highlight inherent fragilities in #Stablecoins, which seek to import central banks’ stability, but lack proper institutional arrangements and credibility.”
On the other side of the spectrum, there are crypto enthusiasts who aren’t willing to yield to the traditional fiat currency system of banks and believe in decentralization. The most prominent of them, antivirus mogul John McAfee committed suicide in a Spanish prison, this time last year.
Despite his fall into infamy through tax evasion, McAfee is still regarded as a prophet by bitcoin evangelists who still believe in his prediction of bitcoin crossing $100,000. He is famously quoted to have said, “You can’t stop things like Bitcoin. It’s like trying to stop gunpowder.”
Edward Moya, a senior market analyst at OANDA, said, “The latest crypto market crash was due to a de-risking Wall Street moment that created a cloud of pessimism amidst inflation, shaky stock market, and rising interest rates. Bitcoin is still twice as valuable as it was a couple of years ago despite losing more than 70% of its value.”
Despite extreme skeptics claiming that the leading cryptocurrency will tank below $10,000 in 2022, moderate voices believe that bitcoin can still hit $100,000.
Kate Waltman, a New York-based certified public accountant and crypto specialist said that the most knowledgeable educators in the space are predicting $100,000 bitcoin in Q1 2022 or sooner. Crypto plunged after the prediction.
Ian Balina, CEO of Token Metrics, still believes that crypto will reach $100,000-$150,000 in the future but did not specify the timeline.
What lies ahead?
Blockchain technology isn’t going anywhere as there is already a lot of institutional adoption. Countries like El Salvador are already using bitcoin as a legal tender. Big banks like JP Morgan rolled out the first US bank-backed cryptocurrency called “JPM coin” to transform the payment business. The bank offers six cryptocurrency investments despite CEO Jamie Morgan being a bitcoin skeptic.
Another serious player on the field is the CEO of Facebook’s parent company Meta. Mark Zuckerburg’s Metaverse plans to popularize cryptocurrencies, blockchain, and VR technologies. Meta is already on the verge of launching Libra- a currency meant to circumvent unnecessary transaction charges.
The Ethereum blockchain has also found use through the sale and purchase of NFTs like the Bored Ape Club. There are dedicated marketplaces for NFTs like Opensea.io.
Blockchain technology has already proved itself. It found use in charity and support in India during the second covid wave and in Ukraine during the invasion.
There are already blockchain companies like Horizon State trying to develop technologies for direct democracy, eliminating the need for representative democracy and ensuring there is no voter fraud. In the future citizens will vote on issues and not on who will lead them.
Blockchain also is a tool for permanent record keeping. It is used to unalterably store birth certificates, deeds, driving licenses, etc. Though filled with scams and get-rich-quick schemes, many projects are undervalued and might make massive gains in the coming decade. Bitcoin was 11 cents in 2010; it is all about finding the gem in the rubble.
An anonymous investor when asked about the recent crash commented, “I have lost 80% of the value on my assets. But I will continue to hodl (hold on to dear life). I did not invest in these projects to make a quick buck. Markets have ups and downs. I believe in blockchain tech and its potential to change the world.”
Despite the fall of currency values, the underlying technology will continue to grow and revolutionize human societies. The crypto winter might be here for a while, but as the technology progresses, expect another bull run.