The crash in cryptocurrency markets has continued this week, wiping out a massive $1.35 trillion in value since reaching all-time highs in November and leaving many regular holders shocked.
The ongoing crash comes at a time of extreme volatility across global markets, with the broad-based S&P 500 shedding around eight percent of its total value in 2022 alone. The downturn has led to rising fears about an impending economic collapse and the prospect of greater regulation of the blockchain industry. According to a Pew Research Study, at least one in six Americans hold at least one form of crypto assets.
“You’re going to get more people calling their elected representatives, generally unhappy about crypto or feeling they were wronged in some way,” said Ian Katz, managing director of Capital Alpha Partners, a Washington policy analysis firm, told The Washington Post. “All regulators and members of Congress want to appear to be alert behind the wheel, and if this turns out to be a continued bloodbath, it increases the impetus for action.”
Such dramatic declines have had an increasingly greater impact as a result of the widespread adoption of cryptocurrencies. Last year, the country of El Salvador made Bitcoin an official legal tender alongside the U.S. dollar. In the wake of the recent downturn, the International Monetary Fund (IMF) has urged President Nayyib Bukele to reverse the decision, warning that a failure to do so would make it harder to get a loan from the institution.
However, others argue that the crypto market remains robust. Tyler Cowen, professor of economics at George Mason University, wrote in Bloomberg that the current volatility is a result of risk and liquidity issues and that the loss in value is “largely imaginary.”
“The plunge in crypto prices doesn’t seem to be the result of a newfound understanding that crypto institutions are irrevocably flawed,” Cowen explains. “Instead it is due to an unpleasant mix of persistent inflation, higher real interest rates, lower equity prices for the major technology companies and geopolitical fears. All of that is bad news — but not necessarily bad news about crypto. The same crypto fundamentals are in place. Higher real interest rates make the future less valuable in present discounted value terms, but crypto has no special place in that misfortune.”
“The bottom line is that even a large fall in crypto prices won’t create a lot of social worries,” he continued. “The Federal Reserve doesn’t have to panic, and the regulators don’t have to take action. Regardless of whether you are a crypto optimist or a crypto pessimist, at the social level, the loss of that $1.35 trillion in value is largely imaginary.”
Meanwhile, others point out that moving in now may be the wisest decision. Louis LaValle, managing director at crypto fund manager 3iQ Digital Assets, told Distributed Ledger that Bitcoin is “at really attractive buying levels if you are a long-term buyer because you could be averaging around a 50% discount versus where we saw the all-time highs.”
“At a $30,000 price point, I think most folks are buyers, and at $40,000, what you have to watch is will the trend reverse and will we break out to the upside,” LaValle said. “I don’t really think we potentially test below $30k. Again, I think we could, but my rationale is that the risk for those 70% to 80% type drawdowns that we saw in 2014 or 2017 during the last bear cycles is much lower today.”
“Because we have more public adoption, [there is also] more institutional investor participation,” he added. “It’s a much different ecosystem.”
Forbes reported on Thursday that President Joe Biden is preparing an executive order set to ask federal agencies to determine crypto risks and opportunities.
The executive order, which is expected to come into force next month, will supposedly “put the White House at the center of Washington’s efforts to deal with cryptocurrencies.” Yet at this point, whether Biden’s interference into the largely decentralized crypto space can have a positive impact on markets remains to be seen.