Crypto Crash Descriptors: This is why you lose money

If you had invested £100 (US$122) in cryptocurrency Luna a month ago, you would have been quietly convinced that you had made a reasonable bet. However, Luna’s value has declined sharply since then. At the time of writing, £100 is worth around 4p (5¢).

Luna was by no means the only victim of the week when cryptocurrencies disappeared. 30% reduction. Some have recovered to some extent, but this still represents a total seven-day loss of more than US$500 million (£410 million), prompting existential questions about the future of the market.

This crash may have been triggered by a financial “attack” on stablecoins. soil (UST) must match the US dollar, but Currently trading for only 18 cents. partner coin, LunaIt collapsed afterwards.

not attack These kinds of trades are very complex and involve making multiple trades in the crypto market to trigger a specific effect that can provide a significant profit to the “attacker”.

In this case, these trades caused Terra to fall, as did their partner coin, Luna. When this became known, panic erupted, which triggered a market pullback, creating a greater panic. Some (but not all) stablecoins rely heavily on awareness and confidence, and if they shake, they can cause significant declines.

Crucially, the recent major decline in cryptocurrencies has raised questions about how stable it is. stable coin Really. After all, they are designed to be practically zero volatility by holding a “peg” to other underlying assets.

However, the effects seen this week have spread throughout the entire crypto space, “black wednesday“(Black Wednesday was the day in 1992 when speculators forced a collapse in the value of the pound). Even the best stablecoins tether lost stakeDown to 95 cents per dollar the need for regulation. If stablecoins are not stable, where is the safe place for cryptocurrencies?

Crypto Confidence

How investors respond will be key to the future of cryptocurrencies. We have already seen panic and despair, and some have compared this crash to traditional practice in banks. but together bank runCustomers tend to worry that the bank will not be able to pay them rather than worry that their money will become worthless.

A more accurate comparison is stock market crash This is where investors worry that their stocks and stocks may soon become worthless. And so far, the reaction to this cryptocurrency crash suggests that a large portion of cryptocurrency holders are viewing their investments in a similar way.

Despite historical price volatility, there are basic assumptions often seen in investor behavior. The assumption is that asset prices will and will continue to rise. In this scenario, investors do not want to miss out. They see an asset go up, see it as “something for sure,” and then invest.

Early successes allow investors to invest more. Combine this with social media and continue investing with the fear of missing out on “essential” gains.

Simply put, many people would have invested in cryptocurrencies because they believed it would make them richer. There is no doubt about this belief.

However, another motivation to invest in cryptocurrencies may be a belief in their transformative nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchanges.

For these investors, the increase in the value of cryptocurrencies is an indication of the growing power of cryptocurrencies compared to traditional currencies. However, similarly, a serious decline in the value of cryptocurrencies is not merely a monetary loss, but an ideological one.

But at the same time, this ideological position creates a group of investors who are much less likely to sell in the face of a sharp decline. And it is this group that can still give hope to this sector.

In an established stock market crash, we are talking about a return to “basic value”. The underlying value of cryptocurrencies is often considered zero. But perhaps there are at least some fundamental values ​​based on faith. The size of the pool of investors who believe in the long-term future of cryptocurrencies and the promise of new money can determine the fundamental value of cryptocurrencies.

Indeed, if we consider cryptocurrency investors as a group of different motives, we can better understand the behavior we are seeing. Investors can take comfort in the fact that we’ve seen the worst of the crash and better times are on the way. However, as financial advisors say, nothing is guaranteed in cryptocurrencies as in other markets.

This article is Gavin BrownAssociate Professor of Financial Technology, Liverpool University; Richard WhittleCAPE Policy Fellow, UCLAnd Stuart MillsBehavioral Science Fellow, London School of Economics and Political Science is reissued from conversation Under Creative Commons License. read original article.

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