The market value of most cryptocurrencies has plummeted over the last few months, leaving investors reeling.
The steep fall amid a wider market dip poses risks for the future of crypto assets and raises questions about their insulation from the rest of the economy.
The global market capitalization of cryptocurrencies recently dipped below $1 trillion, down from above $3 trillion in November of last year.
That decline has come from all parts of the crypto world, from steady falls in the value of popular coins to the complete implosion of major projects.
After peaking at nearly $70,000 per coin late last year, Bitcoin, which remains the most traded currency on the market, is now trading for a little more than $20,000. Other top coins like Ethereum and Solana have experienced similar falls.
The collapse of the Terra network, with its two cryptocurrencies designed to maintain one at $1 a coin, has also played a role in wiping out value in the space. Other projects, like the play-to-earn game Axie Infinity, have also floundered.
Some crypto assets have recovered value over the last week, but still remain far away from their 2021 peaks.
The fall of cryptocurrencies through much of 2022 has coincided with plummeting stock values as rising interest rates, inflation and recession fears rattle financial markets across the world. The Dow Jones Industrial Average, S&P 500 and Nasdaq composite have all fallen more than 20 percent from their most recent record highs amid a darkening economic outlook and investment experts fear deeper losses could be ahead.
While cryptocurrencies were envisioned as an alternative to traditional financial assets such as stocks and bonds, digital token values have moved in the same direction as stock prices at an increasing rate.
Bruno Macchialli, CEO of Delchain, attributed the connection to the growing numbers of financial institutions and traditional investors who entered the crypto market over recent years.
“We’ve seen main players — financial players, U.S. companies getting into the crypto world. So I think it’s not illogical that we start to see a behavior that is maybe equal to what’s happening in the traditional market,” he said.
Cryptocurrencies are likely to face deeper pressure from rising interest rates as the Federal Reserve continues to boost borrowing costs and fight inflation. The values of stocks and other riskier financial assets tend to fall as borrowing costs rise, business earnings decline and consumers put less money in markets and more in savings.
While most cryptocurrencies are not tied to the financial performance of a company, they could still face threats as higher rates and rising recession fears prompt fewer people to buy and play the market.
As the market has grown, so to has the impact that crypto fluctuations can have on average consumers.
And with firms now allowing investors to put coins into their retirement accounts, exposure is only more likely to increase.
“The average person should take from [the fall in crypto value] that one needs to be extremely careful and cautious,” said Oleg Elkhunovich, a partner at trial firm Susman Godfrey who has been involved in several commercial crypto litigation cases. “As they say — only invest what you can afford to lose in this asset class.”
The lack of meaningful regulations for crypto platforms can amplify the risk of volatile price swings.
The particularly steep fall of the crypto market in June, for example, coincided with the world’s largest crypto exchange, Binance, and a leading lending firm, Celsius Network, blocking everyday users from withdrawing assets.
Congress has struggled to pass federal standards on cryptocurrency. The most recent bipartisan bill by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) faces an uphill battle amid criticism for moving authority of the assets away from securities regulators.
The increased investment in crypto may ultimately lead to more oversight independent of regulatory action by creating more opportunities for litigation, according to Elkhunovich.
“The reality is, from a civil litigation side, you need damages,” he explained. “Clearly there are damages out there now.”
Supporters of cryptocurrency say that while the downswing has been damaging, it also provides an opportunity for the industry to correct some of its issues and emerge stronger.
Macchialli said the crypto bear market will also continue to weed out crypto tokens and offerings that aren’t built to last in times of economic turmoil. Those collapses, he said, are a natural part of the industry’s evolution.
“The ones that are remaining are the ones that are having a real utility model based on on something that they are proposing and that investors are seeing something positive based on strategy or willingness,” he said.