Anyone who thought cryptocurrencies were a type of asset protected against economic effects such as inflation might change their minds. Last weekend, the global digital currency market was worth less than 190 billion euros and the decline continues. After another week of continuous devaluation, the world’s first cryptocurrency, bitcoin, hit its lowest value since November 2020 on Saturday. The price fell 9%, at 18,732 dollars (17,847 euros), while Europe slept, keeping investors awake at night, who consider the price of 20 thousand dollars (19.56 euros) as a reference threshold.
Some analysts believe that below this threshold, the risk of liquidating credit-based crypto investments increases very significantly. In recent years, the world has made huge investments in cryptocurrencies, on the order of billions of dollars, especially during the pandemic. The lack of profitability of other asset classes led many investors to “park” money in cryptocurrency and other assets that promised higher returns because they were riskier, such as “meme stocks”a digital art and the non-fungible tokensWhere NFT.
Many purchase orders are placed in cryptocurrency, but there are also those that use credit. Until the interest rate hike, it was cheaper and the expense did not overlap with the expected benefit from the appreciation of bitcoin and other digital currencies. Between the start of the pandemic, in March 2020, and November 2021, the benchmark currency saw its value increase 12 times, reaching $64,400 last fall. Everything seemed to be going well, despite the old warnings against the risks coming from so many different sides. like the IMF.
But the hike in interest rates announced by central banks in Europe and the United States makes credit more expensive and, with the fall of digital currencies, this investment is no longer profitable. The purchase order with other cryptocurrencies also becomes more expensive as all digital currencies have lost value. Investors scared of a possible recession shun all speculative assets. In economics, this is called bursting the bubble. Signs of risk abound.
The CoinGeck platform, which gathers information on cryptocurrencies, puts the market value of digital currencies, this Saturday, at 900 billion dollars, which means that this market has lost two thirds of its value since the end of 2021, while that it was worth three. billions of dollars.
Earlier this week, a major cryptocurrency ‘bank’, New Jersey-based Celsius Network, banned currency withdrawal or transfer between accounts, citing ‘extreme market conditions’ for the decision. Companies like this or Babe Financial, who have followed the same path, act without regulatory oversight and escape the rules of traditional banking, for example.
This allows them to accept “deposits” with the promise of significantly higher returns than usual. The interest rate can reach 20%, depending on the type of asset that is “deposited”. These institutions then make money by “lending” these assets to others: they charge between 5% and 10% in fees and pocket the difference between the interest rate promised to the depositor and the interest rate charged to the borrower.
It turns out that bitcoin – which happens to be a benchmark for the entire digital currency market – has lost 59% of its value since January and 70% since its peak last fall. Another currency, ether, has already lost 73% this year.
In May, the luna currency collapsed and lost 99% of its value in one day, from $20 billion to almost zero in 24 hours. There are those who call you “the Lehman Brothers moment” of cryptocurrencies. There were life savings that “evaporated” in a fraction of the time. There are those who demand a criminal investigation in the United States.
The hedge fund (hedge fund) Three Arrows Capital confirmed on Friday that it had taken a hit from the debacle. He has not returned the deposits, paid the interest and has no money left to cover the losses. Will seek to be rescued, according to the Wall Street Journal.
As in the stock market, where big tech companies are losing market value due to fears of a recession induced by tight monetary policy imposed to control inflation, the cryptocurrency planet is also seeing a rush of investors. Companies like Coinbase Global Inc, Gemini and Blockfi have already announced that they will lay off thousands of people.