From the Olympus highs of investment to the depths of hell. The extreme volatility of cryptoassets has been notable in recent weeks, wiping out half the value of this market since November and leaving it at 1.28 billion dollars. In other words, in just six months investors have seen the equivalent of the entire GDP of Spain vanish. These losses have reopened the debate about whether this will serve to separate the wheat from the chaff in a universe of more than 10,000 assets, or on the contrary, we are looking at the biggest financial fiasco since subprime.
The massive flight of risk assets due to the fear of economic slowdown, which highlighted the correlation of cryptocurrencies and equity markets. This time, the wave of sales involved the Luna/Terra USD binomial, the most powerful stablecoin (linked to the value of a currency) on the market so far.
Luna is in reality the token linked to the Terra USD (UST) stablecoin, whose promise lies in parity with the dollar. Through complex systems of incentives, one fluctuates and is issued depending on how the other behaves. In April, Luna was trading at 117 dollars after multiplying its value by 1,000 in two years. In just a few hours it was reduced to ashes, when UST lost parity with the dollar, exposing the weakness of a system which in principle was 100 per cent secure.
Virtual currencies emerged with the idea of decentralising payments away from scrutiny of governments and central banks. There are no intermediaries or regulators. Through blockchain technology, control lies with the users, and it is they who validate the operations through P2P (point to point) mechanisms, meaning that operations have to receive the go-ahead from the digital community first.
The use of bitcoin, for example, as a means of payment is still very limited. So its meteoric rise in recent years shows that investors buy from a base of speculation about its future value. And that has been the greatest unknown about a market which, by law, nobody is obliged to engage in.
One of the risks presented by this market is the process of 'mining' with which cryptocurrencies are created, something that requires the use of powerful computers that consume a great deal of energy. Until not long ago, 75 per cent of all that consumption took place in China. In total, the electricity consumed by bitcoin mining is 124.87 tw/h a year, more than entire countries. "One single bitcoin transaction uses the same amount of energy as an average American home in a month," according to Funcas.
Given the meteoric growth in recent years, some countries fear the crypto market will destabilise local finances so they prohibit mining and, in extreme cases like China, transactions as well. Some governments have linked these operations with money laundering and fraud.
After the recent crash, experts agree that "clean-ups like this are a good way to get the inexperienced out of the market". In other words, cryptoassets should not be written off as dead, but should start to be taken more seriously. Not as a speculative investment, but as an opportunity to develop the blockchain technology that already has important uses in the banking and financial systems.