The cryptocurrency market faces a correction of more than 60% since November, a scenario in which both the industry and its users reconfigure their expectationsand in which the time of high yields seems to have given way to the survival of projects with value and not merely speculative, after almost two years of strong growth and adoption.
The market capitalization of all cryptocurrencies -including Bitcoin (BTC) and the rest of crypto assets- reached this weekend the US $ 1.06 billion, almost 65% than the US $ 3 billion that had come to be worth just eight months behind.
The hardest hit is the so-called altcoins -those cryptos that are not BTC- that have fallen 70, 80 and even 90% in recent months, especially projects linked to decentralized finance (DeFi), games and NFTs (Token No Fungible, by its initials in English).
The cause of this phenomenon lies in the end of the policy of “easy money” that the main central banks of the world promoted between 2020 and 2021 to get out of the Covid-19 crisis, to which is now added the rise in energy and food prices around the world due to the war between Russia and Ukraine.
The announcement of interest rate hikes by the Federal Reserve to stop the escalation of prices -the highest in 40 years- is above all affecting the demand for risky assets, such as the shares of technology companies or securities of emerging countries . However, the crypto market suffers doubly from its lack of maturity.
A pivotal event in trust for crypto occurred in early May when the Terra blockchain crashed.
The lack of purposes of use of cryptocurrencies at a massive level and the problems of the ecosystem make them the most punished by investors.
A pivotal event in trust for crypto occurred in early May when, in just three days, the Terra blockchain completely crashed, taking with it nearly $50 billion invested in a native crypto (LUNA) and a stablecoin (UST) that was supposed to maintain a one-to-one parity with the price of the dollar.
The combination of a stablecoin that offered an annual interest of 18% with a price support mechanism based on the market value of LUNA -which became the fifth cryptocurrency with the highest capitalization value among more than 20,000- made the day that it failed The mechanism unleashed a major crisis that affected the entire ecosystem.
“The problem with DeFi is that if something can break, eventually it will. Terra had a bad economic design, not scalable, and it didn’t matter that it was such a large project. When it failed, it disappeared completely,” Pablo Sabbatella explained to Télam. , director and founder of Defy Education.
In Argentina, many users who had bet – without knowing or measuring the risks – on a “risk-free” currency that promised returns that do not exist in the market were affected.
“The use of stablecoins grew strongly in the pandemic as a dollarization mechanism. But much of that adoption reached a retail public that does not understand or is not interested in decentralization. In the case of UST, influencers and exchanges promoted it very badly. like something risk-free,” Sabattella added.
For this reason, he affirmed, the role of the financial education It is key to understand what is being invested in and what capital is being involved since “many people were the first time they entered crypto, who chose understood that a stablecoin was synonymous with zero risk and that they invested money that was not willing to lose.”
The fall in prices hits the companies in the sector
The drop in prices is also leading companies in the sector to announce personal reductiona brake on their regional growth strategies and to find ways to subsist in a market in which it will no longer be so easy to obtain financing.
“Companies that have a concentration of their profits in retail grew a lot in the past cycle. However, as new companies, not all of them carried out good control and are in a position where they are dismissing or rejecting offers already made,” said Fernando Martínez, director general of the Americas in OSL.
The drop in prices is also leading companies in the sector to announce personal reduction
“However -he added-, this is cyclical, precisely within these periods is when well-capitalized companies begin to gain more marketshare, and work within their internal improvements.”
Specifically in Argentina, the companies Buenbit and Bitso announced the dismissal of almost 200 workers, something that was also seen in other fintech companies in the region and even in giants of the technological vanguard such as Tesla, which announced the reduction of 10% of its plant. The effect of a “search for quality” within the crypto universe itself is also beginning to be felt.
The market dominance of Bitcoin – that is, how much of the money invested in cryptocurrencies is destined for BTC – reached 48%, the highest in 11 months, as investors in the sector choose to take refuge in an asset with a greater relative history, something that It happens in all bear markets.
In this regard, Martínez pointed out that “just like the past cycle, new technologies and protocols that emerge during the bull market are cleaned up during the “bear” market, due to lack of adoption or constant use and failures. But this is important since they survive the strongest.”
“The market naturally selects what is value and what is not. The hype of 20,000 cryptocurrencies is not logical. 99 percent will not exist in 10 years and those in which the money they generate come from something real will survive. Sabbatella concluded.