Bitcoin, ethereum and cardano falter and infect stablecoins like Tether | markets

The cryptocurrency market dawns this Friday with a certain calm after a black Thursday, with a possible contagion effect towards other traditional financial assets. The bitcoin, the most popular virtual currency, has depreciated close to 20% during the week. Other of the most traded digital assets, such as ethereum either cardano, accumulate higher crashes, which they managed to soften on Thursday in part after digesting some of the initial shock. Only on the day of Thursday, the cryptoactive market lost 200,000 million dollars. The widespread falls shake the foundations of this fledgling industry, which had promised to replace conventional money. This Friday, bitcoin recover 5% and ethereum up 7%.

The origin of this correction is the same as the one that has been affecting the stock markets for weeks: the rate hikes by the US Federal Reserve to try to contain runaway inflation. With the evaporation of easy and cheap money, the slogan of “risk off” has been installed in the markets and investors are selling their riskiest positions without stopping.

Although cryptocurrencies had been chaining losses for a couple of months, in recent sessions there have been several qualitative changes. The first of these is the contagion of these crashes to those known as “stable digital currencies”, cryptoactives that theoretically guaranteed their solvency by promising their parity with the dollar (or with other currencies issued by States).

Representation of Ripple, Bitcoin, Etherum and Litecoin

Representation of Ripple, Bitcoin, Etherum and Litecoin REUTERS

Tetherthe largest of these “stable currencies”, fell yesterday to its lowest level since December 2020. In theory, the value of this type of asset should evolve in parallel with the dollar, but investors are beginning to distrust the promise of parity with the dollar.

Investors used stablecoins such as tether or terra USD to provide them as collateral to carry out purely speculative operations with other cryptocurrencies or to make transactions, that is, a risk-free asset. With that guarantee in question, doubts pounce on the entire cryptoactive sector. A day earlier, another so-called stablecoin completely collapsed. Terra USD –or USTD–, which was also linked to the dollar, has collapsed and is trading at $0.01.

A good example is what happened on Thursday with Coinbase, a virtual currency trading platform that went public a year ago, as one of the businesses of the future. At its premiere, the shares were worth 342 dollars. They are now trading at $42.

Only on Thursday they plummeted more than 20%. A punishment to which was added the anger of its clients after learning that it suspends the terra USD contracts on its platform due to its depreciation.

Ignacio de la Torre, chief economist at Arcano Partners, explains that “cryptocurrencies have behaved with the irrational exuberance of other financial assets, moving to the beat of what central banks dictate, despite having promised that they were an asset decorrelated with the rest of the financial markets.

During the last two years, investment in cryptocurrencies went from being a rarity reserved for lovers of computers and technology to becoming an asset that interested all kinds of financial institutions: banks, fund managers, advisors… all attracted in the heat of revaluations and new money.

In fact, bitcoin had managed to sneak into some traditional financial halls, thanks to exchange-traded funds (ETFs) that were referenced to the value of cryptocurrencies. Sweden, Germany or Switzerland have already authorized the issuance and trading of this type of ETF. The SEC, the US supervisor, had it under study.

The Governor of the Bank of Spain, Pablo Hernández de Cos, explained yesterday in a financial forum that, as a general principle and according to the history of financial crises, “the sudden growth of assets that are not regulated requires action by the authorities ”. Cos recalled that this market has gone from being worth 16,000 million dollars to more than three billion in just five years.

Anatomy of a puncture

  • Generational. A significant portion of cryptocurrency investors belong to the millennial generation. They are thirtysomethings who did not suffer in their pockets the crisis triggered by subprime mortgages and the collapse of Lehman Brothers (2008) or the puncture of the dotcom companies.
  • Private banking. As Bitcoin accumulated appreciation after appreciation, especially after the pandemic and the lockdowns, many private bankers began receiving inquiries from clients to see how to invest in this new asset, in which their children were making their fortune. “The doubt was not whether to invest or not, but what part of the portfolio to dedicate,” explains a financial advisor who operates in Miami.
  • Institutionalization. When the big banks and fund managers saw the money pouring into crypto assets, they wanted to join the party. Fidelity, one of the largest financial groups in the US, even created a working group to bring digital assets closer to its clients.

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