Bitcoin And Crypto Market Rattled By A $2 Trillion Free-fall

What started this year in crypto markets – especially Bitcoin – as a “risk-off” bout of selling fueled by a Federal Reserve suddenly determined to rein in excesses has exposed a web of interconnectedness that looks a little like the tangle of derivatives that brought down the global financial system in 2008. 

The Collapse Of The Crypto Market, Starting With Bitcoin.

As Bitcoin slipped almost 70% from its record high, a panoply of altcoins also plummeted. 

The collapse of the Terra ecosystem – a much-hyped experiment in decentralized finance – began with its algorithmic stablecoin losing its peg to the US dollar. This ended with a bank run that made $40 billion of tokens virtually worthless.

The seeds that spawned the meltdown – greed, overuse of leverage, a dogmatic belief in “number go up” – aren’t anything new. 

They’ve been present when virtually every other asset bubble popped. In crypto, at this exact moment, they are landing in a new and still largely unregulated industry all at once. An industry with boundaries blurred and fail-safes weakened by a conviction that everyone involved could get rich together. Now, all kinds of investors in the crypto market – including those using eToro and other interactive brokers – are wondering if they should keep their bitcoin investments or not.

Bitcoin Highs And Lows

The crypto market is known for its ups and downs, but the latest slide is unprecedented in its magnitude

Bitcoin has gone through several major drops in its history. Most of it known by its cognoscenti as “crypto winters” and to the rest of finance as a bear market. However, the market’s expansion and increasing adoption from Main Street to Wall Street means more is at stake now. 

Kim Kardashian hawking a cryptocurrency that tanked shortly afterward is one thing, but Fidelity’s plans to offer Bitcoin in 401(k)s could impact an entire generation. Its growth has also made this year’s turbulence reverberate that much more. After crypto’s last two-year hibernation ended in 2020, the sector spiked. It spiked as high as $3 trillion in total assets last November, before plunging to less than $1 trillion.

“It’s got a different flavor this time,” Jason Urban, co-head of trading at Galaxy Digital Holdings, said in an interview. Galaxy, the $2 billion digital-asset brokerage founded by billionaire Mike Novogratz, benefited immensely from crypto’s rise. Nonetheless, he was also one of the industry’s most prominent investors in the Terra experiment. “Truthfully, it’s being a victim of your own success.”

Bitcoin Loans

Generally, Crypto loans — particularly those in decentralized-finance apps — often require borrowers to put up more collateral beyond the loan’s worth. But when market prices sour, loans that were once over-collateralized become suddenly at risk of liquidation. This process often happens automatically in DeFi and has been exacerbated by the rise of traders and bots – like bitpanda – hunting for ways to make a quick buck.

Regulators are circling the sector, watching for signs of instability that might threaten their infant plans to rein in crypto. Even rules that were announced in spring have had to change in the wake of Terra’s collapse, with some jurisdictions preparing rules to ease the systemic impact of failed stablecoin systems. Any further crypto failures could ultimately pave the way for tougher rules, making a market rebound any time soon less likely.

On Monday, Bitcoin slumped along with much of the rest of the crypto market, declining about 3.5% to $20,650 as of 10:30 a.m. in New York. The world’s largest token is down about 35% this month alone.