RIP encryption? – The Washington Post


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Three and a half months ago, the hardworking staff of Spoiler Alerts wrote a column about cryptocurrencies. I was, to put it mildly, bearish: “One rule of thumb I have for asset bubbles is if celebrities start getting into the game, maybe it’s time for the smart money to come out . Some celebrities are already being sued for promoting cryptocurrencies that turned out to be classic Ponzi schemes. This suggests that while the crypto will not disappear, we have reached the bubble phase.

A quarter of a year later, I’m sure everything has stabilized – wait, what does that New York Times story say from last week?

The price of Bitcoin plunged to its lowest point since 2020. Coinbase, the big cryptocurrency exchange, fell in value. A cryptocurrency that billed itself as a stable medium of exchange has collapsed. And more than $300 billion has been wiped out by a crash in cryptocurrency prices since Monday.

The crypto world went into complete meltdown this week in a selloff that graphically illustrated the risks of experimental, unregulated digital currencies. Even though celebrities like Kim Kardashian and tech moguls like Elon Musk have spoken about crypto, the accelerating decline of virtual currencies like Bitcoin and Ether shows that, in some cases, two years of financial gains can disappear from the balance. day to day.

The moment of panic represented the worst cryptocurrency reset since Bitcoin plummeted 80% in 2018.

Crypto’s decline echoes the decline of other risky asset classes like tech stocks – except, as the financial press has repeatedly noted, crypto’s declines have been far more acute than even losses. recent S&P 500.

What’s particularly damning about the recent crash is that an awful lot of tech boys who talked about crypto argued that cryptocurrencies were a great hedge against inflation. Inflation has undeniably increased over the past year and, well, that’s when crypto crashed. As Scott Chipolina and Katie Martin of the Financial Times noted, “Their performance undermined claims that crypto assets can provide inflation hedges or behave like a form of digital gold – not to mention the largest boasts from crypto proponents of the potential for digital tokens to become the mainstay of a new global financial system.

Moreover, in an ominous echo of the 2008 financial crisis, one of the triggers for the market crash occurred when a relatively “safe” investment – money market funds in 2008, stablecoins in 2022 – wasn’t sure. Whoops.

As a crypto-skeptic, it’s tempting to go all Nelson Muntz on this situation. It wouldn’t be charitable. Rather, the question is whether the 2008 comparisons will go further. Could the Crypto Collapse Predict Another Financial Crisis? It seems unlikely. The overall size of the cryptocurrency markets is simply not large enough to lead to a general liquidity or solvency crisis.

Instead, the crises are real but more specific. El Salvador is an excellent cautionary tale for other countries in the South. Last September, Salvadoran President Nayib Bukele announced that bitcoin would be accepted as legal tender. A month later, he announced that his government had purchased $25 million in bitcoins. He persisted in embracing crypto despite warnings from bond rating agencies and the International Monetary Fund that it was a risky strategy.

Today, El Salvador is in financial difficulty. El Pais reports that Salvadoran bonds are trading at only 40% of face value. Bitcoin has lost more than 44% of its value since the Salvadoran purchases began, which is equivalent to their next bond payment. According to Bloomberg News, “Bukele, a strong supporter of cryptocurrencies…has been trying for more than five months to sell a bitcoin-backed bond. But investors soured on El Salvador bonds, concerned not only about the government’s ability to keep its debt current, but also its willingness to do so. One wonders if voters will start questioning why Bukele is buying bitcoin rather than spending on things like schools or roads.

Another crisis will be latecomers to crypto who cannot afford to ride out market fluctuations. Crypto retail buyers have made their choice based on horribly biased information. They are now paying the price.

What, if anything, will the government do in response? It is to be expected that regulations are coming. While cryptocurrencies have largely lobbied to advance their libertarian beliefs, it is striking how the crisis is pushing some of them to adopt New Deal financial regulations.

Crypto has suffered crashes like this before. Boosters like Elon Musk and Jack Dorsey will probably be fine. Plutocrats sitting on billions of dollars possess the most valuable financial asset of all time: the time and the cushion to ride out the vicissitudes of capital markets. This crash, however, will likely thwart their preferred outcome – more widespread acceptance of crypto in financial markets – for some time.

The Hidden Upside: Celebrities Finally Go Shut up about cryptography.

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