The price of Bitcoin has fallen to its lowest point since 2020. Coinbase, a major cryptocurrency exchange, has fallen in value. A cryptocurrency that was promoted as a stable medium of exchange failed. More than $300 billion has been wiped out by the fall in cryptocurrency prices since Monday.
The crypto world experienced a complete meltdown this week in a selloff that graphically illustrated the risks of experimental and unregulated digital currencies. Even as celebrities like Kim Kardashian and tech moguls like Elon Musk have talked about cryptocurrencies, the accelerating decline of virtual currencies like Bitcoin and Ether shows that in some cases, two years of financial gains can disappear overnight.
The moment of panic represented the worst cryptocurrency reset since bitcoin plunged 80 percent in 2018. But this time, the price drop has a wider impact as more people and institutions hold the currency. Critics said the collapse was long overdue, while some traders compared the alarm and fear to the start of the 2008 financial crisis.
"This is like a perfect storm," said Dan Dolev, an analyst who covers crypto companies and financial technology at the Mizuho Group.
During the coronavirus pandemic, people have flocked to virtual currencies, with 16 percent of Americans now owning one, up from 1 percent in 2015, according to a Pev Research Center survey.
Big banks like Northern Trust and Bank of America also jumped in, along with hedge funds, some of which used debt to further increase their crypto bets.
Early investors are probably still in a comfortable position. But this week's sharp declines were particularly acute for investors who bought cryptocurrencies when prices rose last year.
The fall in cryptocurrencies is part of a broader retreat from risk assets, fueled by rising interest rates, inflation and economic uncertainty sparked by Russia's invasion of Ukraine. Those factors have exacerbated the so-called pandemic hangover that began as life began to return to normal in the United States, hurting the share prices of companies like Zoom and Netflix that have thrived during the lockdown.
But the decline in cryptocurrencies is more serious than the broader stock market decline. While the S&P 500 is down 18 percent so far this year, the price of bitcoin is down 40 percent over the same period. In the last five days alone, Bitcoin has fallen 20 percent, compared to a 5 percent drop in the S&P 500.
How long the cryptocurrency collapse could last is unclear. Cryptocurrency prices have typically recovered from major losses, although in some cases it took several years to reach new heights.
"It's hard to say, 'Is this Lehman Brothers?'" said Charles Cascarilla, founder of blockchain firm Pakos, referring to the financial services firm that went bankrupt at the start of the 2008 financial crisis.
"We will need more time to figure it out. You can't respond with this kind of speed."
The origins of cryptocurrencies date back to 2008, when a shadowy figure calling himself Satoshi Nakamoto created Bitcoin. Virtual currency is presented as a decentralized alternative to the traditional financial system. Instead of relying on gatekeepers like banks to facilitate trade, bitcoin proponents preferred to conduct transactions among themselves, recording each one in a shared ledger called the blockchain.
Prominent technology leaders, including Mr. Musk, Twitter founder Jack Dorsey, and investor Marc Andreessen embraced the technology as it grew from a new curiosity into a cult-like movement. The value of cryptocurrencies has exploded, creating a new class of crypto billionaires. Other forms of cryptocurrencies, including Ether and Dogecoin, have gained public attention, especially during the pandemic, when excess cash in the financial system led people to daily trade for fun.
Cryptocurrency prices peaked late last year and have since declined as fears about the economy grew. But the crash gained momentum this week when TerraUSD, the stablecoin, exploded. Stablecoins, which are meant to be a more reliable medium of exchange, are usually pegged to a stable asset like the US dollar and are meant not to change in value. Many traders use them to buy other cryptocurrencies.
TerraUSD has been backed by credible venture capital firms, including Arrington Capital and Lightspeed Venture Partners, which have invested tens of millions of dollars to finance crypto projects built on the currency. It gave "a false sense of security to people who wouldn't otherwise know about these things," said Kathleen Brightman, one of the founders of Tezos, a crypto platform.
But TerraUSD was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that tied its value to a sister cryptocurrency called Luna.
This week, Luna lost almost all of its value. This had an immediate impact on TerraUSD, which fell to a low of 23 cents on Wednesday. As investors panicked, Tether, the most popular stablecoin and the linchpin of crypto trading, also faltered from its own $1 fix. Tether fell to as low as $0,95 before recovering. (Tether is backed by cash and other traditional assets.)
The volatility quickly attracted attention in Washington, where stablecoins were on the radar of regulators. Last fall, the Treasury Department issued a report urging Congress to come up with rules for the stablecoin ecosystem.
"We really need a regulatory framework," Treasury Secretary Janet Yellen said at a congressional hearing Thursday.
"In the last few days, we have had a real-life demonstration of the risk.
Stablecoins "present the same kinds of risks that we've known for centuries in banking," she added.
At the same time, other parts of the crypto ecosystem have deteriorated. On Tuesday, Coinbase, one of the largest cryptocurrency exchanges, reported a quarterly loss of $430 million and said it had lost more than two million active users. The company's share price has fallen 82 percent since its triumphant market debut in April 2021.
Brian Armstrong, CEO of Coinbase, tried to reassure customers on Twitter that the company was not in danger of bankruptcy after a required legal disclosure of the ownership of its assets caused panic.
Cryptocurrency prices also plummeted. The price of bitcoin fell to just $26.000 on Thursday, down 60 percent from its peak in November, before rallying somewhat. Since the start of the year, bitcoin's price action has largely mirrored that of the Nasdaq, a benchmark heavily weighted by technology stocks, suggesting investors are treating it like any other risk asset.
The price of ether has also fallen, losing more than 30 percent of its value over the past week. Other cryptocurrencies, such as Solana and Cardano, are also in decline.
Any panic could be overstated, some analysts say. A study conducted by Mizuho found that the average Bitcoin holder on Coinbase will not lose money until the price of the digital currency falls below $21.000. According to Mr. Dolev, this is where a real death spiral could occur.
"Bitcoin worked until nobody lost money," he said. "When it gets back to those levels, it's kind of an 'Oh, my God' moment."
Professional investors who have weathered past cryptocurrency volatility have also remained calm. Hunter Horsley, CEO of Bitvise Asset Management, which provides crypto investment services to 1.000 financial advisors, met with more than 70 of them this week to discuss the market. Many did not sell, he said, because every other property also fell. Some even tried to take advantage of the downturn.
"Their attitude is, 'This isn't fun, but there's nowhere to hide,'" he said.
Still, falling prices have rattled crypto traders. Just a few months ago, blockchain proponents were predicting that the price of Bitcoin could rise to $100.000 this year.
"I never thought things would turn ugly this quickly," said Ed Moja, a crypto analyst at trading firm OANDA.
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