The fall in the price of cryptocurrency

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The fall in the price of cryptocurrency

  • Bitcoin has lost a fourth of its value in the last 30 days.
  • Prices of almost all cryptocurrencies have seen a similar steep downward movement over the last month.
  • The plunge have revealed new insights and vulnerabilities of market.

Is the Bitcoin price fluctuation a new phenomenon?

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  • History is filled with many instances of big price falls and big price rises within a short period of time.
  • Over the years, speculators have flooded in to take advantage of such volatility.
  • Downside risks come swift and steep.
  • Inherent volatility rules it out as a medium of exchange.
  • All these and the fact that cryptocurrencies are designed to bypass official monetary mechanism of any country make most governments wary of them.

What’s new about this phase of the cryptocurrency price fall?

  • It has come at a time when war in Ukraine and disruptions global supply chain have resulted in record-high inflation throughout the world.
  • To tackle it many central banks have hiked interest rate.
  • Cryptocurrencies, which are riskier investments, are weighed down in such an environment where investors want safety more than anything else.
  • Cryptocurrencies were promoted as those that could weather these storms.
  • Bitcoin was conceived more than a decade ago as ‘digital gold,’ a long-term store of value that would resist broader economic trends and provide a hedge against inflation.
  • But Bitcoin’s crashing price shows that vision is a long way from reality.
  • Vulnerability in cryptocurrency ecosystem also played its part in recent price crash.

What vulnerability was revealed during this crash?

  • The Bitcoin value was impacted by stablecoin called TerraUSD.
    • Stablecoins: type of cryptocurrency that seek to hold their value steady, even if Bitcoins of the world have rough journey.
    • They do this by pegging to a currency such as dollar.
    • TerraUSD’s idea was to maintain a value of $1.
  • It maintains its peg through an algorithmic solution, wherein if it drops below $1, a trader is encouraged to receive a ‘sister’ token called Luna at a discounted price in exchange.
  • Recently peg was lost, and investors began to pull out, and both the stablecoins had a free fall.

How are governments reacting to this?

  • Governments are trying to regulate stablecoins.
  • U.K. government: planning to bring stablecoins within the scope of electronic payments regulation.
  • While crypto market have stabilised after big fall early this month, future course of the prices isn’t clear.

Exam track

Prelims take away

  • Cryptocurrency
  • Bitcoin