If you’ve been watching your crypto wallet, or keeping an eye on financial headlines this week, then you know that the marketplace that caters to things like Bitcoin took a huge hit in the last few days. But experts say you may not want to abandon ship entirely.
As with all things in the cryptocurrency world, the story behind the crash is difficult for the uninitiated to understand. Think of it like trying to learn the language of the stock market at the same time you’re learning computer programming. In simple terms, it comes down to two main parts: continued concerns over inflation causing people to tighten their wallets and a very specific type of currency losing almost its entire value nearly overnight.
The first one is easy to understand. As prices stay high and go higher, people might sell their cryptocurrency – whether that’s Bitcoin or Ethereum or something else – in order to have cash on hand to pay bills. If more people are selling the currency than buying it, the value of the coin goes down.
The second part, though, is tricky. Journalists at CNET and Bloomberg have done comprehensive write-ups on the specifics but the quick version is this: TerraUSD — which, unlike its counterparts, backed its currency with an algorithm rather than actual, real-world collateral — lost nearly all of its value. The stablecoin UST (a type of coin used literally to stabilize the marketplace), which is supposed to be pegged to the US Dollar, is now trading at about 20 cents. The company’s cryptocurrency, Luna, is virtually zero.
“Those algorithmic stablecoins, they’re always going to the fail. They don’t work,” says Dr. David Noble, Director of the Werth Institute at UConn. “You can’t do this by an algorithm. You can’t create stability in something that is naturally unstable with an algorithm.”
This huge crash caused a ripple effect throughout the marketplace, resulting in about $300 million in value disappearing.
Dr. Noble isn’t too concerned about the overall health of the cryptocurrency market, though, despite the fact that many of the biggest coins out there have lost half their value in just a few months. That’s because while short-term investments might not pay off, in the long term, these coins are still trending upward.
“No different than any other investment strategy, if you’re trying to time the market, you’re gonna get crushed. If you bought Bitcoin or Ethereum and held it for a four-year period, I don’t think there is any combination of four-year periods where your investment hasn’t grown greatly.”
But Dr. Noble says the crypto market is still extremely volatile, thanks in part to the fact that it is still quite new in the world of finance. Fifteen years ago, no one had heard of Bitcoin. Today, even with that huge loss, it is still nearly $30,000 per coin.
“I don’t know when and I don’t know how or what’s gonna drive it, but I’m more and more convinced that you’re gonna see prices keep going up in the long term,” explains Noble. “We’ll find a new bottom. Two or three years ago, the bottom was $3,000. We’re not even approaching that.”
The key to fixing that volatility, says Dr. Noble, is better adoption. The more people investing in the marketplace, and the more places you can utilize cryptocurrencies for actual transactions, the more stable it will become. As proof, he points to the way technology has changed dramatically over just the last few years, cementing companies like Google and Facebook, or the adoption of things like the Apple or Android wallets, which allow you to leave your home essentially without taking your wallet with you.
“If [Bitcoin] becomes a balance sheet accepted currency … I don’t even know where the price goes. But I’m convinced that we’re not anywhere near the high,” he says.