As much as markets are going through it right now, cryptocurrencies are really going through it, and the myriad disasters haven’t abated just yet. Fortunes have been lost. Memes have been deflated. Normal people have had to learn what it could possibly mean that El Salvador is “buying the dip.” What does it mean? What’s going on with Bitcoin? Stablecoins, huh?? Let me catch you up.
Bitcoin Blowout
Let’s start with the biggest boy. On Monday, Bitcoin sharply plunged in value along with other popular digital currencies, leading to an $800 billion loss in the overall cryptocurrency market as of this writing.* Nearly 40 percent of Bitcoin holders went underwater on their investments, as the value of a single coin has dropped below even last year’s post-crash July low. Throughout this week, multiple coins have seen double-digit losses in value. In response, blockchain networks have halted trade of certain currencies as they attempt to stabilize the market, which is down 20 percent from last week.
AdvertisementAdvertisementAdvertisementAdvertisementWhat’s going on here? Well, as is true with stock markets, there appear to be a lot of Bitcoiners selling off their holdings in the wake of financial and economic insecurity. The Federal Reserve’s hikes in interest rates have kicked off, discouraging risky investments—like, say, historically volatile digital currencies—as well as the speculative trading that’s fueled the recent boom in crypto exchanges. With the Fed making it more expensive to place bets on the markets, investors are less confident that cryptocurrencies will remain a steady holding as regulators battle inflation.
AdvertisementAdvertisementAdvertisementBitcoin is far and away the world’s most popular cryptocurrency, so when it crashes, so do the places it circulates. Coinbase, the U.S.’s largest crypto exchange, recently reported a quarterly loss of $430 million, a nearly 20 percent drop-off in users, and the possibility of bankruptcy—which would wipe out all its remaining users’ crypto holdings. Plus, many crypto companies are publicly traded on the stock market, so as investors back away from stocks, leading to market declines, those companies’ real-time values go right down with it. Sell-offs of both the currencies and the companies lead to no good.
AdvertisementAdvertisementThere’s another, slightly more complicated factor that also helps explain the slump, which is …
Stablecoin Instability
Within the world of crypto, there are different types of value systems. Bitcoin gains its value from the limited amount of coins available in its network, the number of holders, and investor confidence. But another type of digital currency, known as a stablecoin, pegs its value to legal tender like the U.S. dollar. Some types of stablecoins also use algorithms to control their supply of currency and stay consistent with the dollar’s value. This is meant to preserve some government-backed confidence in virtual markets—but even this is flailing.
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The crypto project Terra produces the two coins: the TerraUSD coin, a stablecoin, and its sister token, Luna, whose price moves with demand. The former is supposed to always remain at $1, but it fell to 60 cents on Monday, and all the way down to 26 cents on Wednesday (as of this writing, it’s sitting at 82 cents). Luna, meanwhile, lost up to 96 percent of its value over the past week.
AdvertisementAdvertisementWhy didn’t the stablecoins do their ostensible job? According to CoinDesk, the trouble began over the weekend on Anchor, the main trading platform for these currencies. Anchor offered high incentives—artificially high, some critics had said—for users to trade their Terra and Luna coins on its platform, thus controlling most of the supply of these coins. When the Fed announced its interest rate hike and traders withdrew their currencies en masse, billions of dollars of value fled Anchor at once. This led to further loss of confidence in the overall Terra platform; as Luna went down, so did TerraUSD. The CEO of Terra’s parent company used emergency reserves of Bitcoin—which the project buys to back TerraUSD in part—to try to prop the stablecoins’ value back up, to little avail.
AdvertisementAdvertisementAdvertisementLoss of confidence in a stablecoin—i.e., the one type of cryptocurrency that’s never supposed to be volatile—doesn’t exactly inspire confidence in other currencies. However, since some other stablecoins, like Tether, do not use algorithms to control their supply and are squarely backed to legal tender value, crypto watchers think Terra’s troubles might not be too worrisome in the long run. Nevertheless, Tether has also fluctuated slightly from matching the dollar on occasion (including recently), and suspicions regarding Tether’s holdings of corporate debt to back its value have heightened. If even a coin like Tether should fall, that would be even more disastrous than Terra’s troubles.
Bukele’s Beach
El Salvador was the first country in the world to establish Bitcoin as legal tender. It’s not been so great.
AdvertisementRest of World reported last week that the country’s national Bitcoin wallet, Chivo, has been abandoned by Salvadorans en masse. Many of them downloaded the wallet during its rollout last September only to ditch it after receiving a small sign-up cash bonus, and new downloads of the wallet have slowed down. Some of its remaining users don’t even use it for Bitcoin trading and merely use the virtual wallet to store dollars, while other Bitcoin traders are switching their holdings to private wallets.
AdvertisementAdvertisementAdvertisementAdvertisementAdvertisementNevertheless, El Salvador’s Bitcoin-maxi president, Nayib Bukele, is doubling down. On Tuesday, he revealed plans for “Bitcoin City,” a so-called smart city to be powered by the currency, and as the Bitcoin crash continued, his government made its biggest Bitcoin purchase yet, “buying the dip” to scoop up 500 coins at an average cost of $30,744. All this, even as the Salvadoran economy is suffering, with fears of a national debt default on the horizon. The International Monetary Fund is pegging offers of a loan to demands for the country to stop using Bitcoin as legal tender.
Now What?
AdvertisementThese crypto troubles may be part of a long-term trend.
Back in January, the crypto market experienced its second-largest loss ever, wiping out more than $1 trillion from its networks. That crash was partly attributed to the same economic trends currently troubling crypto: the Federal Reserve’s announcement of interest rate hikes to tamp down inflation, newly proposed crypto-specific regulations, and investor uncertainty in crypto-centric stocks.
AdvertisementIt’s too soon to predict whether this bodes apocalyptic—after all, hundreds of reports of crypto’s death over the years were greatly exaggerated. But considering that two historic crypto crashes have occurred just in the span of a few months, with similar factors driving both, it’s safe to say a major shift in the power and structure of crypto is underway. Between economic tribulations, government and central bank crackdowns, and users drifting away from the space, all of a sudden it feels like a lot fewer people are saying “HODL.”
Correction, May 12, 2022: This piece originally misstated that the crypto market lost up to $800 million of its value on Monday. It actually lost up to $800 billion. This piece was also updated to clarify how Bitcoin holders lost value on their investments.
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