The emergence of cryptocurrency has attracted increasing capital investment, deepening its ties with the "centralized" financial markets. Critics from the existing financial establishment and the enthusiastic adoption by supporters for payments and investments reflect the very decentralized nature that cryptocurrencies emphasize. This dynamic is progressively blurring the boundaries between finance and value.
From the beginning of 2022 to June 17, Bitcoin had already plummeted by 32%, falling to $20,555. From its peak of $31,784 earlier in the year, it dropped by 35%. In New Taiwan Dollar terms, this was a fall from approximately NT$1.36 million to NT$615,000. Significant single-day declines of 15% on June 12 and another 11% on June 15 sent shockwaves through the market. The second-largest cryptocurrency, Ethereum, crashed from its high of $3,521 to $1,025.
This year's market turmoil began with LUNA's catastrophic 99% devaluation, followed by Bitcoin's sharp decline, which triggered a widespread virtual currency crash. The impact has been extensive, with investment funds, exchanges, and stablecoins all reporting significant "casualties."
US-based business software company MicroStrategy spent $3.97 billion to acquire nearly 130,000 Bitcoins. With Bitcoin's price falling to $22,603, the company faced paper losses of at least $1 billion. Compounding the issue, MicroStrategy had taken a $200 million loan from Silvergate in April by mortgaging 19,466 of its Bitcoins, now facing pressure to provide additional collateral.
Bitcoin and Ethereum Plunge: El Salvador Bears the Brunt
Singaporean hedge fund Three Arrows Capital (3AC) borrowed Bitcoin for investments, using 211,000 Ethereum coins as collateral. As both Bitcoin and Ethereum prices crashed, 3AC was forced to sell at least 14,000 Ethereum coins to meet an $400 million margin call from US crypto asset platform BlockFi.
The algorithmic stablecoin USDD, issued by the "Tron Reserve," lost its dollar peg on the 13th, dropping to a low of $0.91. In an attempt to stabilize its reserves, the Tron Reserve had purchased $50 million worth of Bitcoin (at approximately $28,000 per coin) and TRON (TRX) on June 11, just two days before the sharp decline.
Crypto lending platform Celsius, facing a bank run, suddenly announced it was halting all withdrawals, swaps, and transfers. US cryptocurrency exchange Coinbase revealed plans to lay off 1,100 employees, representing 18% of its workforce. Other firms, like the Gemini exchange founded by the Winklevoss twins, cut 10% of staff, and lending company BlockFi reduced its workforce by about one-fifth.
The collective severe impact on cryptocurrency exchanges, lending platforms, and investors indicates a cascading chain reaction is underway. By late June and July, it remains uncertain which other institutions within the crypto sphere might falter.
One nation suffering significant losses is El Salvador, which adopted Bitcoin as legal tender in 2021. On May 10, when Bitcoin was around $31,000, the government bought 500 coins in a "buy-the-dip" strategy. However, by June 14, Bitcoin had fallen below $26,000. François Villeroy de Galhau, Governor of the Bank of France, remarked at the Davos Forum that El Salvador's experiment with Bitcoin as legal tender demonstrates the considerable risks of embracing cryptocurrency.
The Myth of Essence: Scarcity Doesn't Inherently Create Value
Following the collective crash of cryptocurrencies led by Bitcoin, fundamental questions resurfaced: What is the essence of cryptocurrency? Is it a form of money?
Years ago, during crypto's ascent, Ruchir Sharma, Chief Global Strategist at Morgan Stanley, suggested Bitcoin could end the dollar's dominance or at least pose a significant threat to its hegemony. The UK's Financial Times even ran a foreboding headline: "The Rise of Bitcoin Reflects the Decline of America."
Within a few years, criticism emerged. Warren Buffett compared cryptocurrency to the 17th-century Dutch tulip mania, while economist Nouriel Roubini dubbed Bitcoin the "mother of all scams."
Central bank governors globally have questioned Bitcoin's practical utility. At the Davos Forum on May 23, IMF Managing Director Kristalina Georgieva stated that while Bitcoin might be called a coin, it is not money. She emphasized it is not a stable store of value and compared some cryptocurrencies to Ponzi schemes of the digital age due to their lack of backing by physical assets.
Banque de France Governor Villeroy commented from a payments perspective, stating that for something to be money, it must be a reliable means of payment, have accountable value backing, and be universally accepted as a medium of exchange—criteria cryptocurrencies currently fail to meet.
The Dollar Link: Crucial for Crypto Acceptance
"The promise of limited supply and scarcity alone is insufficient to create value for cryptocurrency. All cryptocurrencies must be convertible to US dollars for the public to be willing to invest. The average person is unlikely to use crypto as a payment tool," said an anonymous fund manager with a NT$1 billion position.
In reality, using cryptocurrency for payments is often expensive and slow. Verifying a Bitcoin transaction takes about 10 minutes, with the average fee recently around $20. However, when Russia invaded Ukraine and certain Russian banks were cut off from SWIFT on February 26, Bitcoin's price surged from $37,000 to a high of $47,000 per coin.
Russia turned to Bitcoin as a tool to circumvent Western sanctions. The head of Russia's energy committee stated the country was willing to accept Bitcoin and gold for oil and gas exports to nations like China and Turkey. This move, covered by outlets from the BBC to Business Insider and even The Diplomat, seemingly challenged Western central bankers' definitions of cryptocurrency.
Since Bitcoin's inception following the 2008 global financial crisis, its relationship with physical assets and the financial system has been debated. Initially popular in underground economies for its decentralization, some now argue its form and price behavior increasingly resemble real currency—at least in the eyes of governments like Russia and El Salvador.
Key Market Debates: Correlation and Central Bank Policy
Several key debates surround cryptocurrency. First, its correlation with traditional capital markets is increasing. If Bitcoin is viewed merely as an alternative asset for storing value, like art, it should theoretically have low correlation with traditional stocks and bonds.
However, academic studies comparing Bitcoin's price with the S&P 500 over a five-year period (November 24, 2013, to February 25, 2018) found a correlation coefficient of 0.78, indicating a strong positive linear relationship.
A May report from research firm Arcane Research noted that Bitcoin's correlation with the S&P 500 had reached an all-time high. Analysis from Babel Research found that since May 2020, Bitcoin's 120-day and 240-day correlation with the S&P 500 has remained persistently high. The 30-day correlation hit nearly 0.8 on May 6, 2022, its highest level since July 2017. This challenges the long-held view of Bitcoin as a hedge against rapid inflation or dollar devaluation, as it increasingly moves in lockstep with equities.
Second, the response of cryptocurrency to central bank interest rate hikes defines its attributes. A major debate before June centered on how cryptocurrencies would react to rising rates. Typically, as bond yields become more attractive, investors sell off riskier assets like stocks. But how would Bitcoin react?
The situation is paradoxical. When central banks like the RBA and the Fed cut rates in 2020 to stabilize markets, Bitcoin, gold, and the S&P 500 experienced an unprecedented synchronous rise. Yet, when the US Federal Reserve announced rate hikes in 2022, Bitcoin also rose by 2.4%.
"Increasing international capital flowing into cryptocurrency has created linkages between previously separate equity and crypto markets," said Lin Yuzheng, an options instructor contracted by several securities firms who has recently begun exploring crypto.
In April 2021, Canada led the world by listing three Ethereum ETFs: the Ether ETF, CI Galaxy Ethereum ETF, and Evolve Ether ETF, with assets under management reaching $1.1 billion. On May 11 of this year, Australia's Bitcoin/Ethereum ETF also began trading.
Lin, proficient in options trading strategies, attempted to apply his experience from options, Taiex futures, and stock trading to cryptocurrency. "The strategies I've confidently used for over a decade don't work in the crypto space. I found that traditional technical analysis simply doesn't apply to cryptocurrency," he observed.
Since its inception, cryptocurrency has attracted significant capital, deepening its connection to "centralized" financial markets. While its price action may not align with traditional technical analysis, it starkly reflects human greed and fear. The criticism from the financial establishment and the fervent support from adopters for payments and investment embody the decentralization crypto champions, further blurring the lines between finance and value.
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Frequently Asked Questions
What caused the major cryptocurrency crash discussed in the article?
The crash was triggered by a combination of factors, including the collapse of specific coins like LUNA, broader macroeconomic concerns like interest rate hikes, and cascading liquidations and margin calls within the crypto ecosystem itself, affecting funds, exchanges, and lenders.
Is cryptocurrency considered a reliable store of value?
Opinions are divided. Major financial institutions like the IMF argue that high volatility prevents cryptocurrencies like Bitcoin from being a stable store of value. However, proponents point to its finite supply and decentralization as long-term value anchors, though this is highly debated.
How are traditional financial markets and cryptocurrencies connected?
Research shows a growing correlation between cryptocurrencies like Bitcoin and traditional indices like the S&P 500. This is largely due to increasing institutional investment, which links crypto markets to the broader flows and sentiments of the global financial system.
Can cryptocurrencies be effectively used for everyday payments?
Currently, significant hurdles exist for widespread daily use. Transaction times can be slow, and fees can be high compared to traditional electronic payments. While technologically possible, it is not yet a practical primary payment method for most people.
What was significant about El Salvador adopting Bitcoin?
El Salvador's move to make Bitcoin legal tender was a landmark real-world experiment on a national scale. It has provided valuable, albeit controversial, data on the practical challenges and risks of integrating a highly volatile cryptocurrency into a national economy.
How do central bank policies affect cryptocurrency prices?
The impact is complex and sometimes counterintuitive. While rate hikes should theoretically make risky assets less attractive, crypto has sometimes moved in tandem with equities. The market's evolution means it now reacts to global liquidity conditions, though not always in predictable ways.