The Crypto frenzy entered a new chapter in as many of the world’s popular cryptocurrencies tumbled in the 3rd week of May. While a basket of currencies like Ether and Dogecoin faced the brunt of the pessimism surging in the world, Bitcoin faced the greatest losses. The spearhead of the cryptocurrency market lost an estimated 45% of its valuation in a week; plummeting from the mid-April high of USD 65,000 to USD 35,287.9 in just five weeks. However, while the nascent investors are going haywire on the losses, this isn’t the first time the market has presented such sharp losses. In fact, the sudden loss in value is, by definition, the very characteristic that sets Cryptocurrencies apart from the traditional fiat instruments of exchange.
The nature of cryptocurrencies is the value proposition of the mode of value. Currencies like Bitcoin operate on a blockchain network: a decentralized system of users that ensures equitable control of the market. Cryptocurrencies are perverse to the traditional currency where the country’s central bank holds the responsibility of controlling the value of the national currency by manipulating the monetary policy. The peak of popularity enjoyed by the cryptocurrencies is therefore due to the unregulated nature of the currencies coupled with an unlimited supply as opposed to the limited money supply in the traditional value chain.
However, with no central authority to control the price, cryptocurrencies have been notorious for being highly volatile and overvalued. While there are a few justifications to the claims, primarily the law of demand and supply that effectively determines the value of a crypto asset and thus sets the true valuation without any bias or active manipulation. However, without a centralized authority, the volatility cannot be avoided which stands as a major impediment for the crypto world to sync with the traditional money markets.
It was hailed since the GameStop fiasco that the naive investors are on a rise to collectively stir instability in the rather stable markets like derivatives. In parallel, a crash was also warned off in the Cryptocurrencies, majorly hinged over the abnormally blooming value of Bitcoin. Bitcoin started to rally in March 2020: hiking from USD 5,000 to USD 50,000 in under 8 months. While many expected the pandemic to be the cause of the bubble, the resumption of the economy in 2021 did little to appease the rolling rise in price. However, edging at USD 65,000 last month, the currency tripped as China announced tightening restrictions against the use of Bitcoin in the mainland jurisdictions. Coupled with the skeptical remarks from Elon Musk – the arguable ambassador of Cryptocurrencies – Bitcoin collapsed from a price of USD 58,958 on 6th May to USD 34,742.5 on 23rd May: a drop of 41% in just under 3 weeks.
The drop, however, is not nearly as devastating if the historical technical analysis is taken into account. According to Visual Capitalist, Bitcoin alone has crashed by 80% more than 3 times since 2012. In a decade, Bitcoin has lost almost all of its valuation multiple times yet has bounced back. The most catastrophic crash was the November 2018 crash that even surpassed the infamous Dot-com bubble’s 78% collapse. Many cryptocurrencies were pummelled by more than 80%, Bitcoin losing more than one-third of its total valuation. Even the roughly USD 700 billion cryptocurrencies’ global market capitalization was wiped off in mere days. Yet, Bitcoin managed to touch the coveted trillion-dollar capitalization.
Despite of the aspirations associated with cryptocurrencies, the rise of digital fiat currencies is the talk of the town. Whether it’s the pilot launch of a digital Yuan or the announcement of the Bank of England (BoE) egarding the establishment of Central Bank Digital Currency (CBDC), the market, despite being expansive, is crowding with experienced competition. While many still purport a decentralized medium of exchange, excessive volatility is the biggest enemy to the success of cryptocurrencies. As reported by CoinDesk, the recent crash caused $8 billion in forced liquidations because the long positions were gained through leverage and margins. Such losses could discourage new entrants to the market or possibly push them towards the fledgling digital fiat with a guarantee of stability and store of value.