100s of titles, one news app for just $10 a month.
Dive Deeper:
What does the current crypto crash indicate for the future of cryptocurrencies?
The current crypto crash was possibly triggered by a financial 'attack' on the stablecoin Terra (UST), which is supposed to…
Can USDC Follow UST's Footpath? Probably Not, And Here's Why
On Wednesday, the cryptocurrency community saw TerraUSD (CRYPTO: UST) the native algorithmic stablecoin of the Terra (CRYPTO: LUNA) protocol lose its peg while bringing…
'Evil genius' may have caused Terra and Luna cryptocurrencies to crash in a 'death spiral'
The devastating effects of the crash of crypto "stablecoins" Terra and Luna are being felt by many but their crash…
CoinSwitch Kuber delists Luna just as crypto exchanges suspend Terra tokens. See details
‘We have now decided to delist Luna to safeguard your interests and those of the larger crypto ecosystem,’ CoinSwitch Kuber…
One subscription that gives you access to news from hundreds of sites
Stablecoin volatility shows an urgent need for regulation to protect consumers
Some cryptocurrencies have always been fairly volatile, with values soaring or plunging within a short space of time. So for…
Indian exchanges delist crypto Luna after 100% fall in 7 days
Luna, which was quoting around $80 level till last Saturday was trading at $0.00002446 level on Friday afternoon, showing a…
Get all your news in one place
Latest Business news:
How a Trash-Talking Crypto Bro Caused a $40 Billion Crash
Do Kwon, a trash-talking entrepreneur from South Korea, called the cryptocurrency he created in 2018 “my greatest invention.” In countless…
Read news from The Economist, FT, Bloomberg and more, with one subscription
Learn More
Google’s Russian business plans to file for bankruptcy
Google says its Russian subsidiary is planning to file for bankruptcy because it can't pay staff and suppliers. Russian state…
SA moves to scrap tax on electric vehicles
South Australia's new Labor government has delivered on one of its election promises and moved to scrap plans for a…
Crypto billionaire Sam Bankman-Fried: ‘I got involved with no clue what a blockchain was’
The FTX founder on hype, the problem with bitcoin and how crypto can build a fairer financial system
Wall Street stocks tumble following weak results from retailers
New York (AFP) - Wall Street stocks suffered one of their worst batterings since 2020 on Wednesday, as downcast earnings…
From analysis to good news, read the world’s best news in one place
Elon Musk loses $12 billion in a day as he tweets politics, slams ESG
Elon Musk said he’d supported Democrats in the past because “they were (mostly) the kindness party,” but has now changed…
EU policy aims for Big Tech ‘gatekeepers’
The European Union’s Digital Markets Act is a bold, innovative attempt to do what no power has successfully done: mitigate…

Cryptocurrencies: why they've crashed and what it could mean for their future

By Gavin Brown, Associate Professor in Financial Technology, University of Liverpool
Shutterstock/WHYFRAME

If you had invested £100 (US$122) in the cryptocurrency Luna a month ago, you might have been quietly confident you’d made a sensible bet. But Luna’s value has since fallen drastically – at the time of writing, that £100 is worth around 4p (5¢).

Luna was by no means the only victim in a week where cryptocurrencies were down 30%. Some have recovered to a certain extent, but this still represents an aggregate seven-day loss of over US$500 million (£410 million), prompting existential questions about the future of the market.

This crash was possibly triggered by a financial “attack” on the stablecoin Terra (UST), which is supposed to match the US dollar but is presently trading at just 18 cents. Its partner coin, Luna, subsequently collapsed.

An attack of this kind is extremely complex, and involves placing multiple trades in the crypto market in an attempt to trigger certain effects – which can provide the “attacker” with significant gains.

In this case these trades caused Terra to fall, which in turn brought its partner coin Luna down too. Once this was noticed, it caused panic, which in turn sparked market withdrawals, which then caused further panic. Some (but not all) stablecoins rely to a large extent on perception and confidence – and once this is shaken, big falls can come into effect.

Crucially, the recent major falls in cryptocurrencies have called into question just how stable stablecoins really are. After all, they are designed to have practically zero volatility by maintaining a “peg” to some other underlying asset.

Yet the effects seen this week spilt over in to the whole crypto space, to create single day losses akin to – or arguably worse than – a “Black Wednesday” for crypto (Black Wednesday was the day in 1992 when speculators forced a collapse in the value of the pound). Even the leading stablecoin Tether lost its peg, down to 95 cents on the dollar, perhaps demonstrating the need for regulation. For if stablecoins aren’t stable, then where is crypto’s safe space?

Crypto confidence

How investors respond will be key to the future of cryptocurrencies. We have already seen panic and despair, with some comparing this crash to a traditional run on the banks. But with bank runs, customers tend to be worried that their bank will be unable to give them their money, rather than worrying that their money has become worthless.

A more accurate comparison is with stock market crashes where investors worry that the stocks and shares they hold may soon be worthless. And so far, reaction to this crypto crash suggests that a large section of crypto holders view their investments in a similar way.

Notwithstanding historical price volatility, there is a basic assumption often seen in investor behaviour: that the asset price will increase, and will keep on doing so. In this scenario the investor doesn’t want to miss out. They see the asset rising, consider it a “sure thing” and then invest.

Woman holding phone showing investment details.
Buy or sell? Shutterstock/Gorodenkoff

Frequently buoyed by initial successes, the investor may then put in more. Combine this with social media and the fear of missing out on “inevitable” gains, and the investments continue.

Put simply, many will have invested in cryptocurrencies because they believed it would make them richer. This belief has no doubt been shaken.

But another motivation for investing in cryptocurrencies may be a belief in their transformational nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchange.

For these investors, any increase in the value of a cryptocurrency is a demonstration of the increasing power of cryptocurrency over traditional money. But likewise, a significant decline in the value of crypto is not simply a monetary loss – it is an ideological one.

At the same time though, this ideological stance creates an investor group far less likely to sell in the face of any sharp fall. And it is this group which may yet provide hope for the sector.

In established stock market crashes we talk of a return to “fundamental value”. The fundamental value of crypto is frequently assumed to be zero. However, perhaps there is at least some fundamental value which is based on belief. The size of the investor pool who own cryptocurrency because they believe in its long term future, and the promise of a new money, may determine that fundamental value of crypto.

Indeed, if we consider cryptocurrency investors as different groups with different motivations, we can better understand the behaviours we are seeing. Investors can perhaps take solace that we may have seen the worst of this crash and that better times may be ahead. But as any financial adviser will tell you, in crypto as in any other market, nothing is guaranteed.

The Conversation

Gavin Brown is a co-founder and Non-Executive Director of a start-up digital assets fund that will not benefit directly from this article.

Richard Whittle receives funding from the Research England Development (RED) fund award to Capabilities in Academic Policy Engagement (CAPE).

Stuart Mills does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

This article was originally published on The Conversation. Read the original article.

What is inkl?
The world’s most important news, from 100+ trusted global sources, in one place.
Morning Edition
Your daily
news overview

Morning Edition ensures you start your day well informed.

No paywalls, no clickbait, no ads
Enjoy beautiful reading

Content is only half the story. The world's best news experience is free from distraction: ad-free, clickbait-free, and beautifully designed.

Expert Curation
The news you need to know

Stories are ranked by proprietary algorithms based on importance and curated by real news journalists to ensure that you receive the most important stories as they break.

Dive Deeper:
What does the current crypto crash indicate for the future of cryptocurrencies?
The current crypto crash was possibly triggered by a financial 'attack' on the stablecoin Terra (UST), which is supposed to…
Can USDC Follow UST's Footpath? Probably Not, And Here's Why
On Wednesday, the cryptocurrency community saw TerraUSD (CRYPTO: UST) the native algorithmic stablecoin of the Terra (CRYPTO: LUNA) protocol lose its peg while bringing…
'Evil genius' may have caused Terra and Luna cryptocurrencies to crash in a 'death spiral'
The devastating effects of the crash of crypto "stablecoins" Terra and Luna are being felt by many but their crash…
CoinSwitch Kuber delists Luna just as crypto exchanges suspend Terra tokens. See details
‘We have now decided to delist Luna to safeguard your interests and those of the larger crypto ecosystem,’ CoinSwitch Kuber…
One subscription that gives you access to news from hundreds of sites
Stablecoin volatility shows an urgent need for regulation to protect consumers
Some cryptocurrencies have always been fairly volatile, with values soaring or plunging within a short space of time. So for…
Indian exchanges delist crypto Luna after 100% fall in 7 days
Luna, which was quoting around $80 level till last Saturday was trading at $0.00002446 level on Friday afternoon, showing a…
Get all your news in one place