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Volatility is the bread and butter of the cryptocurrency market. But these days it’s in absolute shambles as Bitcoin, the largest cryptocurrency that the rest of crypto market tends to tailgate, keeps plummeting partly because it’s heavily correlated to the stock market—also in shambles—and partly because a long-feared crypto timebomb called Terra-Luna has just exploded.
“Crypto is dead,” declared columnist Ross Clark writing in British conservative magazine The Spectator. As it happens in every crash, crypto investors–retail and institutional–coped with memes; Michael Saylor, whose company MicroStrategy is one of the largest holders of bitcoin, posted a photoshopped meme of himself working at McDonald’s. “It’s over,” has become another running gag. It’s far from a jovial atmosphere, though—the sudden crash has left many investors in shock, and the Luna subreddit is filled with investors airing suicidal thoughts and support messages.
But for those long-embedded in the crypto industry, despite appearances, the recent market crash is neither an unexpected turn of events nor a catastrophic end. “Crypto has died at least 4 times in the past,” 0xbender, an NFT developer, tweeted. “What is dead may never die.”
Since the latest bull run started, seasoned crypto investors and traders have wondered when the bear market (a downward market cycle) would start. After all, ugly crashes—a trip to “goblin town” as the meme goes—typically follow long periods of upward price actions. Indeed, Bitcoin lost half its value in July last year, plummeting from over $60,000 to under $30,000 Bitcoin briefly traded for just under $30,000 on Wednesday morning.
But a few things make this crash different, and arguably more painful. No previous crash has been this much affected by the macro conditions of the traditional markets, for one, and since 2020 the crypto market has also seen an explosion of hyped-up and risky projects in the decentralized finance, or DeFi, world—such as the Terra-Luna project—and an uncountable number of interchangeable NFT projects.
“The prices of crypto assets such as Bitcoin have a difficult time standing strong when the world is collapsing around them, so the continuing decline certainly is not surprising,” Josh Olszewicz, head of research at crypto fund manager Valkyrie Investments, told Motherboard.
“Digital assets have always been a bit of a chameleon when it comes to identifying what exactly they are or even what exactly they mean. But as they’ve gotten bigger, prices have been more and more tied with traditional financial market indexes like the S&P 500 and Nasdaq,” he said.
As per an Arcane Research report last month, Bitcoin’s correlation to the traditional markets hit an all-time high of 0.70, where -1 means it’s negatively correlated and 1 is perfectly synced. This is bad news for Bitcoin, often touted as an uncorrelated asset that adds diversification to a portfolio, because the stocks continue to have a negative outlook, according to trader activity in the so-called futures market.
It’s not just the macro conditions, however, and the pain is not being evenly distributed across the whole crypto ecosystem. Outside of Bitcoin, some projects are at risk of being completely wiped out.
A crypto drama that’s been brewing over the past weeks has also added fuel to the flames. UST, a so-called algorithmic stablecoin with a market capitalization of $16 billion that effectively bought its way into relevance, depegged from its normal value of $1, falling as low as $0.45. The Luna token that props up UST and is meant to absorb its volatility has also crashed dramatically, from over $60 to as low as $0.88 today.
Many feared a UST bank run could also violently bring down Bitcoin, and the whole market with it, since Luna Guard Foundation, the organization that backs UST, has several billions of dollars worth of bitcoins in its reserves ready to sell should the stablecoin’s peg need urgent defending.
“Everybody in crypto's hurting right now, and this predictable washout is an unnecessary blow at just the wrong time,” foobar, a pseudonymous DeFi and NFT developer, told Motherboard. “So it's being taken much more poorly than, say, Titan was last summer.” He said he has “enough crypto to be happy if it goes up, enough cash to weather an extended downturn.”
Despite the spectacle of loss, there isn’t much sense of an existential catastrophe as many in the industry have long anticipated an eventual bear market. The writing was on the wall for many that the market was overextended and that this inevitable circumstance would be painful—hyped-up tokens from the current cycle like SafeMoon and Shiba Inu, two memecoins popular among retail investors, had already lost most of their value from their 2021 peaks.
As the prices fall, there's perhaps a silver lining in all of this. “A bearish price period often sees a boom in protocol development as attention is shifted towards quality code and protocol governance, rather than price,” Olszewicz of Valkyrie Investments told Motherboard.
Santiago Santos, an angel investor in DeFi projects, told Motherboard: “It’s a bloodbath as everyone is in survival mode.” But unlike in previous big crashes he experienced in 2012, 2014 and 2018, he doesn’t feel like there’s existential risk to crypto. Back then, it was only Bitcoin with its limited use case. These days, crypto’s driven by smart contract applications that have given rise to DeFi and NFTs.
“The idea of smart contracts was powerful but you didn’t have much utility yet. Today we have thriving markets and users across NFTs, DeFi, gaming DAOs. That’s not going away,” he said.
Although this crash won’t spell the end of crypto as some critics may have hoped, it will bring down what Santos call “fluff:” private investment deals and protocols trading at multiple billions without a working product. “There’s a lot of fluff in crypto which will die off —as is true in Web2 tech with businesses that don’t produce cash flow and have terrible unit economics.”
“Private deals with top teams shouldn’t be raising at $100-200 million valuations. That’s not sustainable. Those deals should be worth an order of magnitude less but that’s what cheap money does to the market—investors chase deals and prop up assets farther out on the risk spectrum without staying disciplined,” Santos said.
“When anyone has billions to deploy into a relatively small universe of deals, it never ends well.”
Perhaps no other corner of crypto has seen as much fluff—and tons of money given its size—as those NFT projects over the past year. Even as so-called blue-chips like the Bored Ape Yacht Club continue to weather the storm, there are thousands of smaller projects out there, many of which have long promised developments like games and metaverses that haven’t yet materialized.
Nicholas “Kix” Kneuper, CEO and co-founder of NFT game Crypto Raiders, told Motherboard that “the NFT space [has] gotten ahead of itself in terms of valuations for the amount of utility they provide and how early we are.”
“It's not uncommon for a new project to reach valuations [exceeding] $100 million after only a few months of work. I expect many valuations to come back down to earth,” Kneuper said.
“But at the same time I think we will see amazing innovation by new projects that will continue to attract smart minds and money to the NFT space. Many people like to compare this NFT bull run to the dot com bubble or ICOs. What people fail to mention is many great companies were created during these booms. While many will fail, the strong will survive and thrive,” he added.
Kneuper, who also trades NFTs and livestreams it, told Motherboard that he has “significant exposure to NFTs, but I am not worried as I have focused my bets on strong projects.” It’s a sentiment commonly shared among NFT investors, often memefied as “my investments are with great jpegs. They will surely come back.”
Tascha Che, macroeconomist whose tweet-based crash course on crypto economics went viral last year, told Motherboard that she thinks “most gaming and NFT projects” and “newer blockchain platforms that haven't got much traction by now and don't have large capital buffer[s]” will have to die out during crypto’s bear market.
“Too many copy-paste projects, too much noise in these spaces, hard to stand out and differentiate... Many of these are fair-weather projects with teams of varying degrees of commitments. Bear market is a good stress test to weed out ones with lower quality,” Che told Motherboard.
But she added she’s “optimistic about the growth of web3 economies and blockchain-based innovations as ever.”
“There's no turning back on this. Cat's out of the bag,” Che said.