Macroscope | What the bitcoin bloodbath reveals about the cryptocurrency market
- The shakeout in the cryptocurrency sector is prompting renewed questions about the foundations of the highly volatile digital asset market
- Such assets were never meant to be a hedge against inflation, and the end of an era of cheap money has accentuated their long-standing weaknesses
More worryingly, cracks in so-called stablecoins, which are supposed to be pegged one-to-one to the US dollar to facilitate trading across the cryptocurrency market, have deepened. Tether, the largest stablecoin, failed to maintain its link to the US currency last month, partly because of a lack of detail about the reserves it had amassed to match the value of its coins in circulation. Some of Tether’s smaller rivals have imploded.
Many cryptocurrency lenders have also come under severe strain, fanning fears of a more rapid unwinding of highly leveraged bets on digital assets. For a sector that was on the cusp of going mainstream, the bloodbath could not come at a worse time.
The Bank for International Settlements, a well-known sceptic of virtual currencies, said in a report published this week that “the fact that stablecoins must import the credibility of central bank money is highly revealing of crypto’s structural shortcomings”.