After going back above the fateful threshold of 30,000 dollars on Tuesday, bitcoin is struggling to climb the slope and go back to this fateful level. In question, the historic collapse last week, during which the market lost more than half of its value, going from 3,000 billion dollars in valuation to 1,400 billion – in just six months -, out of all 12,000 estimated cryptocurrencies. On Wednesday May 11, 2022 alone, in the wake of Tech stocks on the Nasdaq caught up in fears of monetary policy tightening, a wave of panic caused the precious token to lose $200 billion. Is it “The end of an era“, as some predict? Worse, the beginning of a “systemic risk“?
An unprecedented crash or a remake of previous crashes?
The bitcoin crash in April is not unprecedented in terms of volumes. It is, however, by its very nature. Because unlike previous crashes, often directly linked to attacks on token buy-sell platforms, this collapse, after months of increases, is felt throughout the ecosystem.
“Bitcoin’s drop of more than 17% in April 2022 seems to mark the end of an era for the queen of cryptocurrencies, achieving the worst April in its history”, says La Tribune Reda Aboutika, financial market expert at XTB France.
The precious token’s first resounding crisis dates back to 2014, when the bitcoin exchange Mt. Gox went bankrupt, following a theft worth almost $470 million at the time. From a peak of more than 1,100 dollars in 2013, it then peaked two years later at around 230 dollars. This is one of the biggest falls in the history of this crypto asset created in 2009.
“The psychological threshold at $30,000 was tested three times before prices took off to new highs in October and November 2021. It is also worth recalling the sharp fall of 2018, which followed a plunge of more than 80% in the space of a year”, recalls Reda Aboutika.
In their bubble memories, bitcoin fans also cite the year 2017 and the Coincheck crisis, another hacked Japanese platform which then had to pay 400 million dollars after a theft of several hundred million dollars by hackers. Another year cited, 2021, the one that marks China’s official ban on mining cryptos (the computer process that remunerates the miner and on which China was a leading nation). But on these two events, the underlying course of bitcoin is not stopped, except for a slight ebb following the message sent by Beijing.
This time, many observers admit, the rush for the token is part of another context, formerly driven by accelerated digitalization in the midst of Covid-19. “Bitcoin’s correlation with US technology stocks has been strengthening since March and now stands at 0.77 with the Nasdaq. The 40-day correlation with the US S&P 500 index for its part reached a record high of 0.82”, note Reda Aboutika.
“However despite the drop in digital assets, bitcoin is doing better than some US stocks such as Netflix which is down 70% from its highs”, nuance for his part François Laviale, president of Alphacap digital asset management.
The end of bitcoin decorrelated from the markets
Then, faced with the craze for cryptos in 2021, many institutional and banking players have launched new financial products related to crypto-assets. In other words, the chain reaction is no longer just restricted to pro-crypto communities. She doubled down.
So does 2022 mark the end of bitcoin’s decorrelation from the upheavals of the markets, which was nevertheless the promise inherent in the decentralized asset? “ If the stablecoin TerraUSD (UST) 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 stablecoins reveal?
The other lesson of this “carnage” is indeed on the “stablecoins”. Unlike bitcoin and other blockchain protocols, this digital token is backed by a “fiat” currency, most often the dollar. The price of the stablecoin thus respects a strict parity (1 dollar = 1 Tether USDT) in the case of so-called “collateralized” stablecoins. But in the case of algorithmic stablecoins, the parity is defined by an algorithm, recalls Reda Aboutika.
“Stablecoins were created to serve as a bridge between the real world, that of fiat currency, and the world of blockchain. The stablecoin is a bit like the crypto world’s version of the bank account. The tool is handy and commonly used as a safe haven crypto or to easily switch from one crypto to another. “, explains Philippe de Gouville.
However, it is from this technical nuance that the crash on the stablecoin TerraUSD (UST) occurred in 2022, bringing with it a chain reaction and the panic of seeing assets devaluing throughout the crypto market.
” The mechanism is to create tokens on a twin stablecoin, in this case the Luna. To obtain these Lunas which are sold at a discounted price, crypto speculators are incentivized to sell the parent stablecoin (UST), which removes them from circulation.”
Result, faced with this sudden drop in UST, “the risk is that the founder of Luna sells the billions of dollars of bitcoins held to support the UST”, Explain Philippe de Gouville.
A paradox, while stablecoins were originally created to compensate for the volatility of bitcoin.“Stablecoins are also placed in cash wallets. They are lent there against attractive remuneration, to be used in complex DeFi operations. These patterns are sometimes reminiscent of those that led to the 2008 financial crisis.adds Philippe de Gouville.
Since this sudden decline, stablecoins have continued to sink (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 cryptos, so no one to save the system as a last resort”, recalls Philippe de Gouville.
Are we facing a “systemic” crisis?
So the whole question is whether this crash marks the beginning of a more sustainable ebb for cryptos, between 100% decentralized tokens, cryptos on less decentralized private blockchains, stablecoins, central bank digital currencies (MNBC) and even the NFT.
“In reality, these steep price drops amid high volatility are commonplace and can be seen with every bitcoin cycle. Very often, the capitulation phase gives way to an accumulation phase which propels bitcoin prices to new records”, anticipates Reda Aboutika. But to qualify: the adoption of bitcoin by institutions and by Wall Street does not bode well for bitcoin »
“Cryptos have always risen”, adds Philippe de Gouville. “ This crisis is a liquidity crisis that is the death knell for all algorithmic stablecoins. If the USDT stablecoin resists, there will be no contagion and the system will come out stronger”he adds.
“The conditions for a return of the crypto bull market are many: inflation must come down, the war in Ukraine must end, lockdowns in China must end, consumption must hold, and the Federal Reserve must tone down. Graphically, bitcoin needs to manage to settle above $48,000.” concludes Reda Aboutika.