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Cryptocurrency bubble

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A cryptocurrency bubble is a phenomenon where the market increasingly considers the going price of cryptocurrency assets to be inflated against their hypothetical value. The history of cryptocurrency has been marked by several speculative bubbles.[1]

Some skeptics have expressed the view that the entire cryptocurrency market constitutes a speculative bubble. Adherents of this view include Berkshire Hathaway board members, including Warren Buffett, and Bill Gates, Microsoft co-founder and philanthropist.[2] They also include several laureates of the Nobel Memorial Prize in Economic Sciences, central bankers, and investors.

Historical bubbles

2011 booms and crashes

In February 2011, the price of Bitcoin rose to US$1.06, then fell to US$0.67 that April. This spike was encouraged by several Slashdot posts about it.[1] In June 2011, Bitcoin's price again rose, to US$29.58. This came after attention from a Gawker article about the darkweb market Silk Road. The price then fell to US$2.14 that November.[1]

2013 boom and 2014–15 crash

In November 2013, Bitcoin's price rose to US$1,127.45. It then gradually declined, bottoming out at US$172.15 in January 2015.[1]

2017 boom and 2018 crash

The 2018 cryptocurrency crash[3][4][5][6][7] (also known as the bitcoin crash[8] and the Great crypto crash[9]) was the sell-off of most cryptocurrencies starting in January 2018. After an unprecedented boom in 2017, the price of bitcoin fell by about 65% from 6 January to 6 February 2018. Subsequently, nearly all other cryptocurrencies followed bitcoin's crash. By September 2018, cryptocurrencies collapsed 80% from their peak in January 2018, making the 2018 cryptocurrency crash worse than the Dot-com bubble's 78% collapse.[9] By 26 November, bitcoin also fell by 80% from its peak, having lost almost one-third of its value in the previous week.[10]

A January 2018 article by CBS cautioned about possible fraud, citing the case of BitConnect, a British company which received a cease-and-desist order from the Texas State Securities Board. BitConnect had promised very high monthly returns but hadn't registered with state securities regulators or given their office address.[11]

From January to February 2018, the price of bitcoin fell 65 percent.[3] By September 2018, the MVIS CryptoCompare Digital Assets 10 Index had lost 80 percent of its value, making the decline of the cryptocurrency market, in percentage terms, greater than the bursting of the Dot-com bubble in 2002.[9] In November 2018, the total market capitalization for bitcoin fell below $100 billion for the first time since October 2017,[12][13] and the price of bitcoin fell below $4,000, representing an 80 percent decline from its peak the previous January.[14] bitcoin reached a low of around $3,100 in December 2018.[15][16]

Timeline of the crash

  • 17 December 2017: bitcoin's price briefly reached a new all-time high of $19,783.06.[17]
  • 22 December 2017: bitcoin fell below $11,000, a fall of 45% from its peak.[18]
  • 12 January 2018: Amidst rumors that South Korea could be preparing to ban trading in cryptocurrency, the price of bitcoin depreciated by 12 percent.[19][20]
  • 26 January 2018: Coincheck, Japan's largest cryptocurrency OTC market, was hacked. 530 million US dollars of the NEM were stolen by the hacker, and the loss was the largest ever by an incident of theft, which caused Coincheck to indefinitely suspend trading.[21]
  • 7 March 2018: Compromised Binance API keys were used to execute irregular trades.[22]
  • Late March 2018: Facebook, Google, and Twitter banned advertisements for initial coin offerings (ICO) and token sales.[23]
  • 15 November 2018: bitcoin's market capitalization fell below $100 billion for the first time since October 2017 and the price of bitcoin fell to $5,500.[24][25]

Initial coin offerings

Wired noted in 2017 that the bubble in initial coin offerings (ICOs) was about to burst.[26] Some investors bought ICOs in hopes of participating in the financial gains similar to those enjoyed by early bitcoin or Ethereum speculators.[27]

Binance has been one of the biggest winners in this boom as it surged to become the largest cryptocurrency trading platform by volume. It lists hundreds of digital tokens on its exchange.[28]

In June 2018, Ella Zhang of Binance Labs, a division of the cryptocurrency exchange Binance, stated that she was hoping to see the bubble in ICOs collapse. She promised to help "fight scams and shit coins".[29]

2020–2022 cryptocurrency bubble

2020–2021 bubbles

From 8 March to 12 March 2020, the price of bitcoin fell by 30 percent from $8,901 to $6,206.[30] By October 2020, bitcoin was worth approximately $13,200.[31]

In November 2020, bitcoin again surpassed its previous all-time high of over $19,000.[32] After another surge on 3 January 2021 with $34,792.47, bitcoin crashed by 17 percent the next day.[33] bitcoin traded above $40,000 for the first time on 8 January 2021[34] and reached $50,000 on 16 February 2021.[35] On Wednesday, 20 October 2021, bitcoin reached a new all-time high of $66,974.[36]

In early 2021, bitcoin's price witnessed another boom, rising over 700% since March 2020,[37] and reaching above $40,000 for the first time on 7 January. On 11 January, the UK Financial Conduct Authority warned investors against lending or investments in cryptoassets, that they should be prepared "to lose all their money".[38] On 16 February, bitcoin reached $50,000 for the first time.[39] On 13 March, bitcoin surpassed $61,000 for the first time.[40] Following a smaller correction in February, bitcoin plunged from its peak above $64,000 on 14 April to below $49,000 on 23 April, representing a 23% mini-crash in less than 10 days, dipping below the March bottom trading range and wiping half a trillion dollars from the combined crypto market cap.

On 14 April, Coinbase, a much hyped crypto exchange went public on the NASDAQ. Their shared grew by over 31% on their first day to $328.28 pushing their market cap to $85.8B.[41]

Other cryptocurrencies' prices also sharply rose, then followed by losses of value during this period. In May 2021, the value of Dogecoin, originally created as a joke, increased to 20,000% of value in one year.[42] It then dropped 34% over the weekend.

By 19 May, bitcoin had dropped in value by 30% to $31,000, Ethereum by 40%, and Dogecoin by 45%. Nearly all cryptocurrencies were down by double-digit percentages.[43] Major cryptocurrency exchanges went down amid a market-wide price crash. This was partly in response to Elon Musk's announcement that Tesla would suspend payments using the Bitcoin network due to environmental concerns, along with an announcement from the People's Bank of China reiterating that digital currencies cannot be used for payments.[43]

Bitcoin and other cryptocurrencies experienced a solid recovery after Elon Musk met with leading bitcoin mining companies to develop more sustainable and efficient bitcoin mining.[44] After bottoming out on July 19, by early September Bitcoin had reached $52,633.54 while Ethereum grew by over 100% to $3,952.13. After a short but significant fall, both crypto's peaked on November 7, 2021 at $67,566.83 and $4,812.09, respectively. The NASDAQ would peak 12 days later on November 19 at 16,057.44. Since bottoming out after the covid crash in 2020, Bitcoin had grown over 1,200% in value while Ethereum had grown over 4,000% in value while the NASDAQ had only grown around 134%.

In September, Bitcoin officially became a legal tender in El Salvador with many news sources wondering what countries would be next.[45]

As of October 2021, China has continued shutting down crypto trading and mining activities, and Tesla has not yet resumed payments with bitcoin.

2021–2022 crash

After their peak, the crypto market began to fall with the rest of the market. By the end of 2021, Bitcoin had fallen nearly 30% from its peak down to $47,686.81 and Ethereum had fallen about 23% to $3,769.70. Through much of late January to late April, crypto currencies struggled for direction, with Bitcoin swinging between $35,000 and $48,000.

On 13 February, 2022, four crypto agencies purchased Super Bowl ads: Coinbase, FTX, eToro and Crypto.com. Coinbase became one of the most downloaded apps after their ad aired.[46]

In early April the U.S. Securities and Exchange Commission (SEC) announced they would begin to put regulations on the crypto agencies setting the stage for a broad selloff.[47]

On 4 April, Bitmex became the first crypto agency to announce layoffs, laying off 25% of its workers.[48]

On 3 May, the Federal Reserve raised interest rates by 0.5% triggering a broad market selloff.[49] Over eight days, Bitcoin fell 27% to just over $29,000 and Ethereum fell 33.5% to around $1,960. The NASDAQ fell 12.5% during the following five days after the announcement.

On 10 May, Coinbase, with shares down nearly 80% from their peak, announced that if they went bankrupt people would lose their funds. The CEO later announced that they were at no risk of bankruptcy.[50]

On 12 June, Celsius Network, a crypto exchange, announced the halt of all withdrawals and transfers.[51] Bitcoin fell 15% the following day to nearly $22,500 and Ethereum fell to $1,200. A wave of layoffs from other crypto agencies accompanied this, including from Crypto.com and Coinbase.[48]

On 13 June 2022, Tron's algorithmic stablecoin, USDD, lost its peg to the US Dollar.[52]

On 17 June, Bitcoin dipped below $20,000 for the first time since December 2020 and Ethereum fell below $1,000 for the first time since January 2021.

On 17 June, Babel Finance, a crypto lender based in Hong Kong, froze withdrawals.[53]

On 23 June, CoinFlex paused withdrawals after a counterparty, which it later named as Roger Ver, experienced liquidity issues and failed to repay a $47 million stablecoin margin call.[54]

On 27 June, Three Arrows Capital, a cryptocurrency hedge fund, defaulted on a $670 million loan from Voyager Digital, a cryptocurrency broker.[55]

On 30 June, FTX announced they could acquire BlockFi, a crypto firm that had laid off 20% of their staff.[56]

By the end of June, many crypto agencies began to rethink their spending as their funds began to dwindle.[57]

On 2 July, Three Arrows Capital declared bankruptcy.[58]

On 4 July, Vauld, a Singapore-based crypto lender backed by Coinbase and Peter Thiel, halted withdrawals and trading on its platform.[59]

On 5 July, eToro terminated their Special-purpose acquisition company (SPAC) deal and laid off 6% of their workforce.[60]

On 5 July, crypto broker Voyager Digital filed for Chapter 11 bankruptcy.[61]

On 6 July, Genesis Trading disclosed that it was exposed in the Three Arrows Capital bankruptcy.[62]

On 8 July, Blockchain.com announced to its shareholders that it faced a potential $270 million loss from loans made to Three Arrows Capital.[63][64]

On 11 July, it was announced that crypto miners in Texas had temporarily shut down as an intense heat wave put a strain on the energy grid.[65]

On 11 July, the Financial Stability Board (FSB) stated that crypto "must be subject to effective regulation and oversight commensurate to the risks they pose."[66]

On 12 July, a filing with the Southern New York U.S. Bankruptcy Court from attorneys representing Three Arrows Capital creditors stated that company founders current whereabouts were unknown.[67][68]

On 14 July, Celsius Network declared bankruptcy.[69]

On 19 July, SkyBridge Capital froze withdrawals.[70]

On 20 July, Vauld filed for protection against creditors, the equivalent of bankruptcy in the US.[71]

On 20 July, Zipmex, a Southeast Asian exchange, froze withdrawals.[72]

On 25 July, Coinbase came under SEC investigation for potentially lying to their customers. This led to a 21% drop in their stock the next day.[73]

On 8 August, Singapore-based cryptocurrency lender and borrower Hodlnaut suspended withdrawals.[74]

From 7-8 November, FTT, FTX main crypto coin, crashed and lost 80% in value from the result of a "bank run" on the exchange.[75]

On 10 November, BlockFi halted withdrawals with the turmoil from FTX.[76]

On 10 November, the largest stablecoin, Tether, lost its peg to the USD.[77]

On 11 November, FTX declared bankruptcy.[78]

On 16 November, both Genesis Global Trading and Gemini halted withdrawals.[79]

Collapse of Terra-Luna
Main article: Terra (blockchain) § Collapse

In May 2022, the stablecoin TerraUSD fell to 10 US cents.[80] This was supposed to be pegged to the US dollar via a complex algorithmic relationship with its support coin Luna. The loss of the peg resulted in Luna falling to almost zero, down from its high of $119.51.[81] The collapse wiped out $45 billion of market capitalization in a week.[82] On 25 May, a proposal was approved to reissue a new Luna cryptocurrency and to decouple from and abandon the devalued UST stablecoin.[83][84] The new Luna coin lost value in the opening days of being listed on exchanges.[85]

In the wake of Terra-Luna's collapse, another algorithmic stablecoin, DEI, lost its peg to the dollar and started to collapse.[86][87]

Private litigation in the United States
See also: Cryptocurrency and crime, Economic policy of the Joe Biden administration § Cryptocurrency, and Gary Gensler § Cryptocurrency

On January 7, 2022, a class-action lawsuit was filed against EthereumMax alleging it to be a pump and dump scheme with media personality Kim Kardashian, former professional boxer Floyd Mayweather Jr., former NBA player Paul Pierce, and other celebrities also being named in the lawsuit for promoting the Ether cryptocurrency on their social media accounts.[88][89]

On February 18, the U.S. 11th Circuit Court of Appeals ruled in a lawsuit against Bitconnect that the Securities Act of 1933 extends to targeted solicitation using social media.[90]

On the same day, a class-action lawsuit was filed against SafeMoon alleging it to also be a pump and dump scheme with professional boxer Jake Paul, musician Nick Carter, rappers Soulja Boy and Lil Yachty, and social media personality Ben Phillips also being named in the lawsuit for promoting the SafeMoon cryptocurrency with misleading information on their social media accounts.[91][92]

On April 1, a class-action lawsuit was filed in Florida against the LGBcoin cryptocurrency company, NASCAR, professional stock car racing driver Brandon Brown, and political commentator Candace Owens alleging that the defendants made false or misleading statements about the LGBcoin and that the founders of the company had engaged in a pump and dump scheme.[93]

On April 13, Coinbase received a class-action securities fraud lawsuit from its shareholders for including false and misleading statements and omissions in the registration statement and prospectus of its initial public offering.[94]

On June 13, Binance received a class-action lawsuit from more than 2,000 investors accusing the company of false advertising in promoting terraUSD.[95]

On June 17, TerraForm Labs received a class-action lawsuit in the United States alleging the company misled investors in violation of federal and California securities laws in marketing its cryptocurrencies in a manner that resembled securities.[96]

On July 7, Celsius Network received a lawsuit from a former cryptocurrency investment manager alleging the company failed to implement adequate risk management strategies or accounting practices to hedge the firm against cryptocurrency price fluctuations and protect its ability to repay its depositors, and that the company was operating an effective Ponzi scheme.[97]

On July 21, an ex-Coinbase employee and 2 other men were charged with wire fraud and conspiracy to commit wire fraud. This marked the first time charges were brought to people involving crypto assets.[98]

Collapse of FTX
Main article: FTX financial crisis

In early November, Binance, one of the largest crypto exchanges in the world, announced it would be dissolving its holdings in FTX Token (FTT) with reports that most of FTX liquidity was based in this coin and was very unstable. This resulted in a "bank run" on FTX resulting in 90% of all FTT being withdrawn. The price of FTT fell from $22 on November 7 to under $5.00 on November 8, an 80% drop.[75] Abracadabra.com's stablecoin "magic internet money" (MIM) also briefly lost its peg to the US Dollar for the first time since May 2022.[99] This all resulted in a liquidity crisis with the company unable to pay off the withdrawls. On November 8, rival Binance announced plans to buy the company to save it from collapse. This sent shockwaves through the crypto market and led to a 10% drop in Bitcoin price and a 15% drop in Ether price. The following day, however, Binance immediately withdrew its offer causing Bitcoin and Ether to plummet another 14% and 16%, respectively, to their lowest levels since November 2020.[100] The same day, the SEC and Justice Department launched an investigation into the company.[101] FTX would file for bankruptcy protection on November 11.[78]

Skeptical viewpoint

Bitcoin

Further information: Economics of bitcoin

Bitcoin has been characterized as a speculative bubble by eight winners of the Nobel Memorial Prize in Economic Sciences: Paul Krugman,[102] Robert J. Shiller,[103] Joseph Stiglitz,[104] Richard Thaler,[105] James Heckman,[106] Thomas Sargent,[106] Angus Deaton,[106] and Oliver Hart;[106] and by central bank officials including Alan Greenspan,[107] Agustín Carstens,[108] Vítor Constâncio,[109] and Nout Wellink.[110]

The investors Warren Buffett and George Soros have respectively characterized it as a "mirage"[111] and a "bubble",[112] while the business executives Jack Ma and J.P. Morgan Chase CEO Jamie Dimon have called it a "bubble"[113] and a "fraud",[114] respectively. However, Dimon said later he regrets calling Bitcoin a fraud.[115]

Notable cryptocurrency skeptics

Other crypto factors contributing to skepticism

Besides the volatility of the price of cryptocurrency, there are other factors that contribute to investors being skeptical about it. One factor is its trustworthiness. Some investors wonder whether it can be trusted as a high value currency. This may be due in part to the stigma of being associated with nefarious people that carryout financial fraud: Cryptocurrency such as bitcoins have been the preferred choice of payment by cyber criminals that use ransomware to exploit organizations whether large or small out of millions of dollars. This preferred method of payment makes it difficult to trace criminals on the dark web. Cryptocurrency investment fraud schemes have been used to target Individuals as well. The Silicon Valley Business Journal reported that a number of LinkedIn users were victims of cryptocurrency investment fraud.[121] Another factor is security: Cryptocurrency is a digital currency that is usually stored in the cloud. The risk of a digital currency is that it can get lost or stolen during transactions. It is easier for hackers to hack your digital wallet and steal your money. With these factors in mind, many investors cannot help but be skeptical about cryptocurrency.

See also

References

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Further reading

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