The rapid decline in the value of cryptocurrencies is ringing alarm bells for many. There is talk of a crash. What are the triggers – what are the consequences? And is the crypto market threatened with a long downward spiral?
It was supposed to be a big performance for US rapper Jay-Z and Twitter founder Jack Dorsey. They actually wanted to give poorer people in Brooklyn, New York, free Bitcoin courses to educate and impart knowledge on the subject. But after this weekend, interest should no longer be too great: The largest and oldest cryptocurrency, Bitcoin, fell by up to 14 percent to below $18,000 – the lowest level since the end of 2020.
Bonds more interesting again with the turnaround in interest rates
Concerns about the financial markets as a whole played an important role in this development, says Sören Hettler, an analyst at DZ-Bank. “There are several construction sites that come together here,” he says. “On the one hand, the significantly more restrictive central banks have made it clear that they will take action against the high inflation rates – with determination and higher key interest rates. This is a point that is troubling the crypto market.”
Private investors and large investors are withdrawing their money from cryptocurrencies because the actions of the central banks are making lower-risk investments – such as bonds – more interesting again.
Loss of trust from homegrown problems
But the downward spiral of Bitcoin, Ethereum & Co. is also homemade. For example, there is Celsius Network, a kind of bank that also lends cryptocurrency and promises very high returns. Worried about financial difficulties, Celsius had to freeze payment transactions last week. Since then, it has no longer been possible to transfer, exchange, or payout currencies. A bitter loss of trust.
One steers through great challenges, said Celsius boss Alex Mashinsky in a short video. They now want to “stabilize liquidity.” However, the community is hardly reassured by social networks. Even the head of the US Securities and Exchange Commission is calling on investors to be more skeptical.
For Volker Brühl from the Center for Financial Studies at the University of Frankfurt, the Celsius case shows that the problem lies in the “lack of regulation and supervision.” Because transparency and investor protection “either didn’t work at all or only partially on such platforms, and investors are now noticing that.”
Massive losses in value since the beginning of the year
Bitcoin has lost more than 60 percent of its value since the beginning of the year alone. Ethereum, the second largest cryptocurrency, even lost more than 70 percent in value. The recent crash of the Terra USD crypto project also caused turbulence – a coin that should actually provide better protection against risks. In practice, that didn’t work.
There are always big swings up and down in the crypto world. Expert Brühl is currently not ruling out a long downward spiral for Bitcoin & Co. “This trend can actually only be broken if many investors believe that the currencies have now reached a certain bottom, that they are fundamentally undervalued and so on so that there is more buying interest,” says Brühl.
Consequences for investors, hedge funds, and El Salvador
The high losses are already having painful effects – not only for private investors. A Singapore hedge fund is considering an emergency sale of company shares.
However, the crash in cryptocurrencies is much more dangerous for El Salvador. Months ago, the poor Central American country made Bitcoin its national currency alongside the dollar and invested heavily. Now that could be a big problem.
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