three questions about the crash that dropped bitcoin from its pedestal

After returning above the fateful $ 30,000 threshold on Tuesday, bitcoin is struggling to climb the slope and return to that fateful level. In question, the historic collapse of last week, during which the market lost more than half of its value, from $ 3 billion in valuation to $ 1.4 billion – in just six months – of $ 12,000 estimated cryptocurrencies. On Wednesday, May 11, 2022 alone, as a result of technological action on the Nasdaq caught by the fear of tightening monetary policy, a wave of panic caused the precious witness to lose $ 200 billion. Is this “The end of an era“How do some predict? Even worse, the beginning of a”systemic risk“?

  • An unprecedented accident or a remake of previous accidents?

The fall of bitcoin in April is not unprecedented in terms of volumes. It is, however, by its very nature. Because unlike previous accidents, often directly related to attacks on witness buying and selling platforms, this collapse, after months of hikes, is felt throughout the ecosystem.

“Bitcoin’s more than 17% drop in April 2022 seems to mark the end of an era for the queen of cryptocurrencies, reaching the worst April in its history.” says La Tribune Reda Aboutika, an XTB France financial markets expert.

The first major crisis in the precious token dates back to 2014, when the bitcoin exchange Mt. Gox went bankrupt, after a robbery worth nearly $ 470 million at the time. From a high of more than $ 1,100 in 2013, two years later it reached a high of about $ 230. This is one of the biggest falls in the history of this cryptocurrency asset created in 2009.

“The $ 30,000 psychological threshold was tested three times before prices hit new highs in October and November 2021. It’s also worth remembering the sharp drop in 2018, followed by a drop of more than 80%. in the space of a year “. , recalls Reda Aboutika.

In his bubble memoirs, bitcoin fans also cite the year 2017 and the Coincheck crisis, another hacked Japanese platform that later had to pay $ 400 million after a multi-hundred-million-dollar theft for part of the hackers. Another year cited, 2021, marks the official ban on China from mining crypts (the computer process that remunerates the miner and in which China was a leading nation). But in these two events, the underlying course of bitcoin does not stop, except for a slight ebb after the message sent by Beijing.

This time, many observers admit, the rush for the witness is part of another context, previously driven by accelerated digitization in the midst of the Covid-19. “The correlation of Bitcoin with US technology stocks has been strengthened since March and now stands at 0.77 with the Nasdaq. The 40-day correlation with the US S&P 500 index, meanwhile, went reach an all-time high of 0.82 “. note Reda Aboutika.

“However, despite the fall in digital assets, bitcoin is better than some US stocks such as Netflix, which has dropped 70% from its highs.” for his part, François Laviale, President of Alphacap digital asset management.

The end of bitcoin was unrelated to the markets

Then, in the face of the madness of cryptocurrencies in 2021, many institutional and banking actors have launched new financial products related to cryptocurrencies. In other words, the chain reaction is no longer limited to pro-crypto communities. She bent over.

So the year 2022 marks the end of the decorrelation of bitcoin from market turmoil, which was nevertheless the promise inherent in decentralized assets? “ If the TerraUSD (UST) stable currency resists, there will be no contagion and the system will come out stronger. “ says Philippe de Gouville, CEO and co-founder of Ismo.

  • What does the collapse of stable currencies reveal?

The other lesson of this “carnage” is in fact about “stable currencies.” Unlike bitcoin and other blockchain protocols, this digital token is backed by a “fiat” currency, most often the dollar. Therefore, the price of the stablecoin respects strict parity ($ 1 = 1 Tether USDT) in the case of so-called “collateralized” stablecoins. But in the case of algorithmic stable currencies, parity is defined by an algorithm, recalls Reda Aboutika.

“Stablecoins were created to bridge the gap between the real world, the fiat world and the blockchain world. The stable currency is a bit like the bank account version of the crypto world. The tool is useful and is commonly used as a safe haven cryptography or to easily switch from one cryptography to another, “explains Philippe de Gouville.

However, it is from this technical nuance that the fall of the stable currency TerraUSD (UST) in 2022 occurred, which led to a chain reaction and the panic of seeing assets devalue to everything. the cryptographic market.

The mechanism is to create tokens in a stable twin currency, in this case the Luna. To get these moons sold at a discounted price, cryptocurrencies are encouraged to sell the stable currency (UST), which removes them from circulation.

Result, in the face of this sudden fall of the UST, “The risk is that the founder of Luna will sell the billions of dollars of bitcoin he has to support the UST.” Explain Philippe de Gouville.

A paradox, while stable currencies were originally created to offset the volatility of bitcoin.“Stable currencies are also placed in cash portfolios. They lend themselves there with attractive pay, to be used in complex DeFi operations. These patterns are sometimes reminiscent of those that caused the 2008 financial crisis.adds Philippe de Gouville.

Since that sudden fall, stable currencies have continued to plummet (Tether, USDCoin, Binance USD, Dai, driven 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 cryptography, so no one should save the system as a last resort,” recalls Philippe de Gouville.

  • Are we facing a “systemic” crisis?

The whole question, then, is whether this fall marks the beginning of a more sustainable haven for cryptocurrencies, including 100% decentralized tokens, less decentralized private blockchain cryptocurrencies, stablecoins, central bank digital currencies (MNBCs), and even all of the NFT.

“Actually, these sharp price falls amid high volatility are common and can be seen with each bitcoin cycle. Very often, the capitulation phase gives way to an accumulation phase that drives bitcoin prices to new ones. “For the sake of qualifying, the adoption of bitcoin by institutions and Wall Street is not a good omen for bitcoin.”

“Cryptography has always increased”, adds Philippe de Gouville. “ This crisis is a liquidity crisis that is the key to the death of all stable algorithmic currencies. If USDT stablecoin resists, there will be no contagion and the system will come out stronger “add.

“The conditions for a return of the cryptocurrency market are many: inflation must end, the war in Ukraine must end, confinement in China must end, consumption must be maintained and the Federal Reserve it needs to slow down. Graphically, bitcoin needs to be able to settle above $ 48,000. concluded Reda Aboutika.