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Sunday, May 29, 2022

Cryptocurrencies: why they have crashed and what it could mean for their future

If you invested £100 (US£122) in the cryptocurrency Luna a month ago, you can rest assured that you have made a sensible bet. But the value of the Luna has dropped significantly since then – at the time of writing, that £100 is worth around 4p (5¢).

Luna was by no means the only victim in a week where cryptocurrencies were down 30%. Some have recovered somewhat, but this still represents a total of seven days of losses exceeding US$500 million (£410 million), prompting existential questions about the future of the market.

The crash was probably triggered by a financial “attack” on the stablecoin Terra (UST), which is supposed to match the US dollar, but is currently trading at just 18 cents. Its partner coin, Luna, later collapsed.

One attack This sort of thing is extremely complex, and involves placing multiple trades in the crypto market in an attempt to trigger certain effects – which can provide significant profits to the “attacker”.

In this case these trades caused Terra to fall, which in turn brought down its partner Coin Luna. Once this was noticed, it created panic, leading to a market rebound, which subsequently led to further panic. Some (but not all) stablecoins rely heavily on sentiment and confidence – and once it shakes up, a large drop could take effect.

Importantly, the recent massive drop in cryptocurrencies has raised questions about how stable stablecoins really are. After all, they are designed to have practically zero volatility by maintaining a “peg” for any other underlying asset.

Yet the effects seen this week spread throughout the crypto space, creating a day’s loss for – or arguably worse – a “Black Wednesday” for crypto (Black Wednesday was the day of 1992 when speculators were forced to take the plunge. The value of the pound). Even major stablecoin Tether lost its peg, falling as much as 95 cents on the dollar, perhaps reflecting the need for regulation. If stablecoins are not stable, where is crypto’s safe haven?

crypto confidence

How investors respond will be critical to the future of cryptocurrencies. We have already seen the panic and despair, with some comparing the crash to a traditional run on the banks. But with running a bank, customers are worried that their bank will not be able to give them their money, instead their money has become worthless.

A more accurate comparison is with a stock market crash where investors worry that the stocks and shares they hold may soon become worthless. And so far, the reaction to this crypto crash shows that a large section of crypto holders view their investments equally.

Despite historical price volatility, a fundamental assumption is often observed in investor behavior: that the price of an asset will rise, and will continue to do so. In this scenario the investor does not want to miss out. They watch the asset grow, consider it a “sure thing” and then invest.

Buy or Sell?

Often buoyed by early successes, the investor can invest more. Combine this with social media and the fear of missing out on “inevitable” profits, and the investment continues.

Simply put, many people would have invested in cryptocurrencies because they believed it would make them rich. This belief has undoubtedly been shaken.

But another motivation for investing in cryptocurrencies may be the belief in their transformational nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchange.

For these investors, any increase in the value of cryptocurrencies is a demonstration of the increasing power of cryptocurrencies over traditional money. But likewise, a significant drop in the value of crypto isn’t just a monetary loss – it’s an ideological loss.

Also, this ideological stance creates an investor group that is much less likely to sell in the event of any sharp downside. And it is this group that can still provide hope for the region.

In established stock market crashes, we talk of a return to the “fundamental value”. The fundamental value of crypto is often assumed to be zero. However, there are probably at least some fundamental values ​​that are based on faith. The size of the investor pool that owns a cryptocurrency because they believe in its long-term future, and the promise of a new penny, can determine that fundamental value of crypto.

In fact, if we consider cryptocurrency investors as separate groups with different motivations, we can better understand the behavior we are seeing. Investors can probably take solace that we have seen the worst of this crash and that better times may be ahead. But as any financial advisor will tell you, in crypto like any other market, nothing is guaranteed.

World Nation News Deskhttps://www.worldnationnews.com
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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