Cryptocurrencies like Bitcoin took huge nosedives this week. Unfortunately, we aren’t living through the end of crypto — but hopefully the talk of it being the money of the future that will make us all rich has been shown to be lies.
I wonder what Matt Damon is doing today.
Last year, he was shilling hard for cryptocurrency in a multimillion-dollar Crypto.com ad that aired at the Super Bowl. There, he uttered with breathtaking affect as he peered out at what looked like Mars, “Fortune favors the brave.” It’s a long way from his days in Good Will Hunting, playing a working-class kid from Boston’s south side who fights with entitled yuppies at bars and delivers a scathing critique of US imperialism.
Now cryptocurrency prices are tanking across the board, and a lot of ordinary people who swallowed the crypto pill hawked by Damon, Jimmy Fallon, Kim Kardashian, and a fleet of other celebrities have taken an absolute beating.
The TerraUSD and Luna cryptocurrencies, “stablecoins,” are at the center of the storm, and their subreddit has been filled with devastating stories and suicide prevention hotlines over the last forty-eight hours. One person wrote: “I lost over 450k usd, I cannot pay the bank. I will lose my home soon. I’ll become homeless. Suicide is the only way out for me.”
As one viral tweet noted: “If you invested $100 in Luna one month ago, the fourth most popular cryptocurrency at the time, you now have $0.04.” Minutes later, the tweet was updated to say that it was worth less than a penny. Luna is, at the time of this writing, worth $0.0003, and the linked TerraUSD coin, which is supposed to be algorithmically pegged to $1, is now trading at 11 cents.
Bitcoin, meanwhile, the oldest and most widely held cryptocurrency, has dropped in value by over 16 percent in one week and more than 50 percent over the last six months. If its value continues to tank, many ordinary people who were conned into believing that crypto was their path to financial security will be washed out. The entire economy of El Salvador, which made Bitcoin a national currency last year, could go into default.
Yet a good deal of crypto billionaires are still out there telling people to “HODL on” (crypto speak for holding, not selling your crypto). Billionaire Michael Saylor, a kind of father figure to the Bitcoin bros, tweeted: “The ₿est is yet to come.” Of course, when you have “currencies” that are not backed by any states, nor connected to any real goods or assets, hyping them up can increase what people are willing to pay and therefore their stated “value.”
Cryptocurrencies, NFTs, and all manner of crypto-related assets have been on a wildly inflated binge over the last two years, as ultralow interest rates have produced a lot of easy money sloshing around with which to invest in stocks, financial instruments, and crypto.
The world of cryptocurrencies has produced an even wilder Wild West than the already unhinged Wall Street. Pop-up coins, Ponzi schemes, and pump-and-dump schemes are so common in the crypto world that they’re openly discussed and often advocated for. One blogger in December ended a post with the rousing call: “Join a pyramid. It’s not a bubble unless it bursts.”
But the problem with bubbles is that they do always burst. The “value” of the commodities underlying bubbles only grows so long as people are willing to buy what you’re selling. In the case of cryptocurrencies, what you’re selling is a made-up token that lives in cyberspace.
Now that the Federal Reserve has indicated that interest rates will be raised multiple times this year, investors are pulling back from the most volatile assets like crypto. Stablecoins like Terra were supposed to act as way to mitigate against the volatility of cryptocurrencies. But as many crypto skeptics have warned, they are actually the most likely places for the crypto ecosystem to crash.
Stablecoins are tokens that are pegged to an asset (usually the dollar) but that can be traded at the speed of the blockchain and without pesky regulations. They’re used by crypto traders to buy and sell other cryptocurrencies or to hold on to their assets when they want to pull back from riskier currencies. They’re so central to the operation of crypto exchanges that they are often described as their plumbing system. About 70 percent of Bitcoin trading, for instance, is done in Tether, the most popular stablecoin.
But the “stability” behind stablecoins is based on one of two unsustainable models. One is through a backing reserve, where each digital coin represents a dollar held in the bank. Tether uses this model, though nobody knows exactly how much of a dollar reserve they actually have. They’ve been investigated by the New York attorney general, who said that Tether had “recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines. . . . Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”
The other model is an “algorithmic” stablecoin like Terra. The issuers of these types of stablecoins claim that price stability will be maintained through a programming code that changes the number of coins available in response to prices moving above or below their dollar peg, therefore bringing prices back in line through supply-and-demand adjustments.
But as Crypto skeptic David Gerard put it: “Every algorithmic stablecoin thus far has failed to maintain its peg. Algorithmic stablecoins work until they don’t.”
Is this the end for crypto? It’s tempting to make such a prediction when prices are tanking (and when you, like me, would like to see Bitcoin wiped off the face of the planet).
Unfortunately, that seems unlikely. Coins like Terra, Luna, and hundreds of small cryptocurrencies will likely collapse. And a lot of people will lose their shirts, their homes, and more in the process. But there are too many billionaires out there with too much at stake — not to mention a massive, energy-guzzling industry of Bitcoin miners — for crypto to go quietly into the night.
Yet a greater part of the crypto facade has undoubtedly been ripped off: that it is an effective get-rich-quick scheme, that Bitcoin is the money of the future, or that it is a hedge against inflation (!). And, most importantly, that there is a crypto “community” out there, led by billionaires, who want us all to get rich together. If this is the beginning of the end of this tall tale, it couldn’t come too soon.