- Bitcoin is trading just above US$20000 (US$20971.10 at the time of writing), the Luna blockchain is gone, and the general market is in dire times with very few coins and tokens in positive territory on a 12-month basis.
- There was a lot of confidence in markets in the lead-up to the recent crash.
- Some cryptocurrencies have shown resilience in the face of the recent backlash and there is every reason to believe that a rebound will come
The year was 2021. October, to be exact. Bitcoin had just recovered from a crash that had wiped out more than half its value to edge towards a new all-time high. At that point, the all-time high was US$65000.
This seemed impressive but was dwarfed by the consensus that Bitcoin was expected to go over US$100,000 in 2022, taking the rest of the cryptocurrency world to new heights. We are just about halfway through 2022, and the crypto world has been shocked.
Bitcoin is trading just above US$20000 (US$20971.10 at the time of writing), the Luna blockchain is gone, and the general market is in dire times with very few coins and tokens in positive territory on a 12-month basis.
With half the year still to go, cryptocurrencies could well rebound to new highs. Meanwhile, some important lessons and questions have been brought about by the events that have unfolded in 2022, and we should discuss some of them.
Learning from failure
The collapse of stablecoin Terra and the blockchain backing it Luna brings up a lot of questions around stablecoins. Terraforms labs LUNA foundation was a US$2.3 billion fund held in Bitcoin established to defend the value of Terra to keep it stable to the US dollar.
The fund failed in this attempt but did so, leaving some money on the table; the entire fund was not exhausted in trying to defend the peg. This brings about obvious questions on just how committed the custodians of Terra were to defend the peg. The question on stablecoins and the methodology for keeping them stable should indeed present an opportunity to learn from failure. It will be interesting to watch how stablecoins move forward from this fallout.
There was a lot of confidence in markets in the lead-up to the recent crash. Bitcoin being pipped to go over US100000 in this year is one example, and the markets were ripe with optimism that combined with speculation to propel assets such as Dogecoin and Shibainu to exciting levels.
Was there some overconfidence in the market? This is hard to say from an aggregate position, but perhaps in pockets, we can argue that there are coins, tokens and projects that perhaps received more confidence than they were immediately able to handle.
Cryptocurrency markets are no stranger to ups and downs. Large ups and downs at that. One of the hallmarks thus far has been the ability to rebound, and it has fuelled “buy the dip” proponents across the markets. You’d have to go back to 2019 to catch Bitcoin at the prices we are seeing today though current trends may suggest it will go lower.
Some cryptocurrencies have shown resilience in the face of the recent backlash and there is every reason to believe that a rebound will come. The resilience that has made cryptocurrency markets isn’t going to go away overnight, but we may experience a change in the guard.
Regulation isn’t all bad.
One of the most attractive things about cryptocurrency for many enthusiasts has been the lack of regulation. There is no doubt that we have seen the upside of the lack of regulation and centralisation, but now we have seen the other side of the coin.
With entire market capitalisations and blockchains being wiped out, it’s time to start thinking about the possibility of some regulation being a good thing. The fallout of Terra and Luna suggests that market participants could do with some protection. In hindsight, we can agree that trying to defend a market capitalisation of over US$40 billion with just US$2.5 billion isn’t precisely good math.
Markets are markets
With experience in both traditional financial markets and new frontier markets, I have constantly reiterated to people that markets are markets, and it’s not the commodity that makes the difference but rather the participants that bring the similarities.
Behavioural finance is a deep and exciting arm of traditional finance that looks at the behaviour of markets through the psychology of their participants. As cryptocurrency moved from a domain of futuristic technology enthusiasts to the world of mainstream finance with institutional investment, the market’s exposure to the same people that affect mainstream markets grew. As we well know, the crash is being felt in markets across the board equally. This is the penalty for popularity and mainstream adoption.
We have also been visited with a harsh reminder of some of the practices surrounding the cryptocurrency space that we would instead turn a blind eye towards. The promoters of cryptocurrency, in all their capacities, have certainly led some people down a path that does not look like what they were sold. This is not to blame any of the cryptocurrencies, tokens or platforms but to look at the tactics promoters have gotten away with using.
Many people were not clear on how bad things could get or how no recourse was available for their losses. While investors certainly have a responsibility to actively question what they are getting into, we cannot ignore that promoters have taken advantage of the lack of regulation, and it would be wise to keep an eye on promoters in the future.
Know what you’re buying
To wrap this up, the biggest lesson that should’ve been drawn by cryptocurrency market participants is to ask questions to their satisfaction. It doesn’t matter what you’re buying; you need to know what you’re buying. This includes understanding the coin, the project, the blockchain and any mechanisms involved in the maintenance of the coin’s value.
Even with improved regulation, the onus still rests on the investor to be clear about what they are getting themself into. Not new information, but the fallout of the current crash is an important reminder.
Trials and tribulations are a part of all aspects of life. Whether we learn from them or not, is what determines if, indeed what doesn’t kill us will make us stronger.