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September 2, 2022updated 20 Jan 2024 3:33am

Has the crypto bubble burst?

Market volatility in the crypto space has led some to question its long-term future.

By Silvia Pellegrino

Bitcoin is no longer booming. In recent years, it seemed that the value of the world’s leading cryptocurrency could only go up, with the value of a single Bitcoin reaching a high of $68,000 in November 2021. Recent crosswinds in the global economy and a series of scandals, however, have brought that valuation crashing down to around $20,000 this month, along with confidence in the wider crypto ecosystem. As speculation grows about the long-term future for Bitcoin and its rivals, Tech Monitor asks whether the crypto bubble has burst – and what’s next for this once-promising sector.  

What caused the crypto crash? 

One reason why the value of Bitcoin and other cryptocurrencies has dipped in recent months is because of the current volatility in the global economy. Central banks across the world have raised interest rates sharply in recent months to curb rising inflation, itself the result of higher energy prices and post-Covid volatility in supply chains. As money became more expensive to borrow, both VC firms and retail investors gradually began to lose confidence in crypto prospects, choking off the supply of cash from the regular economy into the sector.   

This, in turn, helped trigger a fall in the value of Bitcoin, its competitors and a host of crypto businesses. The situation was exacerbated by sector-specific scandals, not least the fall of TerraUSD (UST.) A type of stablecoin pegged to the US dollar, the value of the cryptocurrency collapsed in May after the founders of UST were forced to sell 80,000 Bitcoins worth $3bn to shore up the coin’s value. The sale had the opposite intended effect, sapping confidence in UST and triggering a run on Bitcoin itself.   

What followed was a crisis in confidence in the sector generally. “The collapse of TerraUSD has started what we used to call ‘the panics’, when major financial institutions sold off large chunks of assets and everyone else tried to take their money out as quickly as they could,” said economist Frances Coppola, in an interview with BBC News.  

What effects will the crypto crash have?

In the short term, the crash in the value of Bitcoin and other cryptocurrencies has wiped millions off investor portfolios – almost $2trn, according to one estimate. While the brunt of these losses has been shouldered by hedge funds and other corporate players in the markets, many individual retail investors have lost thousands of dollars, in some cases wiping out their life savings.  

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Cryptocurrencies like Bitcoin and Ethereum have recently entered what industry observers have called a ‘crypto winter’. It remains unclear when the sector will exit these bearish market conditions. (Photo by PixieMe/Shutterstock)

For many critics of the crypto sector, the crash also underscores the lack of accountability among many cryptocurrencies and associated operations. Having long suffered from a reputation for being home to scams and shaky business practices, the addition of further volatility has had a chilling effect on engagement from VC firms and other institutional investors in the sector. Many have now shied away from investing in crypto businesses that market themselves as part of a broader, long-term trend toward decentralisation in society toward prospects in automation and transportation that have a more logical, and shorter, path to profitability.  

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Even so, economists and bankers do not seem particularly worried about a whiplash effect from the crash on the broader global economy. The relatively few connections between the sector and the banking system mean that a downturn in the former is not likely to have many ripple effects on the latter.  

Will crypto recover?  

Because of the ongoing bear market position, it is hard to make predictions about the overall impact this crash will have on the long-term future of cryptocurrencies. However, the NFT market crash and the recent rumours that cryptocurrency exchange Coinbase is close to bankruptcy have had a negative impact on the crypto market, preventing it from exiting its bearish mode.  

At the end of July, there were some glimmers of hope in the crypto world. While Bitcoin’s price has been edging downward since the beginning of August, other cryptocurrencies seem to be breaking free of the grip that the first of their number has had on the fortunes of the sector. Ethereum, for example, has seen its value climb markedly in recent weeks, in large part due to excitement around its long-anticipated switch to a more environmentally friendly proof of stake operating model. 

Some analysts are even hopeful that the current ‘crypto winter’ will freeze out those investors who were only interested in the market for short-term gains and leave room for visionaries in the field to flourish. Edith Yeung, a partner at Race Capital, recently told CNBC that she believes the long-term health of the crypto space is inextricably tied to an inevitable evolution of the internet to a ‘Web 3.0’ model. 

“I think there’s a whole generation of internet [users who] really believe that ‘you cannot monetise my data anymore … the internet should be owned by us,’” said Yeung. “That’s why there’s such a push with crypto because the ownership of Ethereum or Solana is really the user owning that piece of token – which is only a piece of that internet.” 

Read more: What if Binance collapses?

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