Three questions about the crash that knocked Bitcoin off its base

After getting back above the fateful $30,000 threshold on Tuesday, Bitcoin is struggling to climb the slope and return to that inauspicious level. In question is last week’s historic crash, during which the market lost more than half its value, as the value went from $3000 billion to $1400 billion – in just six months – out of all 12,000 cryptocurrencies estimated. On Wednesday, May 11, 2022 alone In the wake of technology stocks on the Nasdaq Stock Exchange besieged by fears of monetary tightening, a wave of panic caused the token to lose $ 200 billion. Really “End of an era“As some would expect? And worse, the beginning.”systemic risk“?

  • Unprecedented crash or remake of previous crashes?

Bitcoin’s collapse in April was not unprecedented in scale. However, it is by nature. Because unlike previous crashes, which are often directly related to attacks on platforms for buying and selling tokens, this crash, after months of surges, is being felt throughout the ecosystem.

“Bitcoin’s drop of more than 17% in April 2022 appears to mark the end of the era of cryptocurrency queen, as it had the worst April in its history.” La Tribune says Reda Apoteca, financial market expert at XTB France.

The first major crisis for the precious token dates back to 2014, when the bitcoin exchange Mt Gox went bankrupt, following a theft of $470 million at the time. From a peak of over $1,100 in 2013, it peaked two years later at around $230. This is one of the biggest declines in the history of the crypto-asset created in 2009.

“The psychological threshold of $30,000 was tested three times before prices rose to new highs in October and November 2021. Also of note is the sharp drop in 2018, which followed a drop of more than 80% within a year,” Reza Apoteca recalls.

In their bubble memories, bitcoin fans also cite 2017 and the crisis of Coincheck, another hacked Japanese platform that then had to pay out $400 million after hundreds of millions of dollars were stolen by hackers. Another year was cited, 2021, the year that marks the official Chinese ban on cryptocurrency mining (the miner-rewarding computer process of which China was a pioneer). But in these two events, the fundamental path of bitcoin was not stopped, except for a slight ebb after the message sent by Beijing.

This time, as many observers admit, the token rush is part of another context, previously driven by accelerated digitization in the midst of Covid-19. Bitcoin’s relationship with US technology stocks has been strengthening since March and now stands at 0.77 with the Nasdaq. The 40-day correlation with the US S&P 500 index on its part reached a record high of 0.82″, note Reda Apotica.

“However, despite the decline in digital assets, bitcoin is doing better than some US stocks such as Netflix, which are down 70% from their highs,” Nuance on his part is François Laviale, Head of Alphacap Digital Asset Management.

The end of the bitcoin decor related to the markets

Then, in the face of the cryptocurrency craze in 2021, many companies and banking institutions launched new financial products related to crypto assets. In other words, chain reaction is no longer limited to pro-crypto communities. multiplied.

So will 2022 mark the end of the bitcoin relationship from the turmoil in the markets, which nonetheless has been the inherent promise of decentralized assets? “ If the stablecoin USDT holds, there will be no contagion and the system will come out stronger.” says Philippe de Gouvel, CEO and co-founder of Ismo.

  • What does the collapse of the stablecoin reveal?

The other lesson of this “carnage” is actually on “stablecoins”. Unlike bitcoin and other blockchain protocols, this digital token is backed by a “fiat” currency, most often the dollar. Thus the price of the stablecoin respects strict parity ($1 = 1 Tether USDT) in the case of so-called “secured” stablecoins. But in the case of algorithmic stablecoins, parity is determined by an algorithm, recalls Reza Apoteka.

“Stablecoins were created to serve as a bridge between the real world, the fiat world, and the blockchain world. A stablecoin is a bit like the crypto-world version of a bank account. The tool is easy to use and commonly used as a safe haven for cryptocurrency or to easily switch from one crypto to another.”, Philippe de Gouvel explains.

However, technically from this nuance, the crash of the stablecoin TerraUSD (UST) occurred in 2022, which triggered a chain reaction and panic of asset devaluation throughout the cryptocurrency market.

The mechanism is to create the tokens on a stable binary currency, in this case Luna. To get Lunas sold at a discount, cryptocurrency speculators are incentivized to sell the parent stablecoin (UST), removing it from circulation. “

The result, in the face of this sudden drop in the underground reservoirs, “The risk is that the founder of Luna is selling billions of dollars of bitcoin held to support underground treasuries.” explain Philip de Gouvel.

Paradoxically, while stablecoins were originally created to compensate for the volatility of bitcoin.Stablecoins are also placed in cash wallets. They are loaned there for an attractive reward, to be used in complex DeFi operations. These patterns are sometimes reminiscent of those that led to the 2008 financial crisis.Philippe de Gouvel adds.

Since this sudden drop, stablecoins have continued to fall (Tether, USDCoin, Binance USD and Dai led by TerraUSD which lost more than 79.6% in 7 days, according to coinmarketcap.com.

“In essence, there is no central bank in the world of cryptocurrency, so no one is keeping the system as a last resort,” recalls Philippe de Geuvel.

  • Are we facing a “systematic” crisis?

So the whole question is whether this crash marks the beginning of a more sustainable tide of cryptocurrencies, between 100% decentralized tokens, cryptocurrencies on less decentralized private blockchains, stablecoins, central bank digital currencies (MNBC) and even NFT.

“In fact, such sharp price drops amid high volatility are common and can be seen with every Bitcoin cycle. Often, the capitulation phase gives way to an accumulation phase that pushes Bitcoin prices to new records,” Reza Apoteca predicts. But to qualify: Bitcoin adoption by institutions and by Wall Street does not bode well for Bitcoin »

“Cryptocurrencies have always gone up”Philippe de Gouvel adds. “ This crisis is a liquidity crisis that is the death knell for all algorithmic stablecoins. If the stablecoin resists USDT, there will be no contagion and the system will come out stronger.”he adds.

“The conditions for a bullish crypto market comeback are many: inflation must fall, the war in Ukraine must end, the lockdowns in China must end, consumption must continue, and the Federal Reserve must de-escalate tensions. Graphically, a currency needs Bitcoin to settle above $48,000.” Reza Apotica concluded.