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Just As Cryptocurrencies Went Mainstream — a Huge Collapse!

A central weakness is that investors must go through exchanges which have none of the safeguards established for the blockchain itself

The cryptocurrency markets have been in total upheaval for the last several months. The blowup essentially started when the stablecoin UST (provided by Terra) suddenly lost its peg to the US dollar. A stablecoin is supposed to maintain a 1:1 trading match to an underlying currency, so 1 UST is supposed to be worth $1.

Most trading in crypto is trades between stablecoins and other coins rather than actual cash transactions using stablecoins. Due to some unforeseen (but not necessarily unforeseeable) issues, UST lost its peg; between May and June its value dropped from $1 to just over two pennies. This near erasure of value affected Terra’s other cryptocurrency, LUNA, which dropped from $80 to effectively zero over the same time period.

Mature crypto trader investor analyst broker using pc computer analyzing digital cryptocurrency exchange stock market trading graphs report thinking of investing funds risks doing global analysis.

These near wipeouts have created enormous ripples in the cryptocurrency community, as many people used UST and LUNA for trading and reserves. Singapore hedge fund Three Arrows Capital (known as 3AC) was the most prominent of such hedge funds. It has been estimated to have around $10 billion in cryptocurrency assets. However, it was a large investor in LUNA and UST.

The failure of Terra, along with a broader decline in cryptocurrencies, led to 3AC no longer being able to repay loans that it had been given from crypto lender Voyager Digital. This led to the potential bankruptcy of both firms at the beginning of July.

In the same time period, the cryptocurrency exchange Celsius found itself deep in the red because of the surrounding market turmoil. In May, the company was offering up to 17% yield on customer deposits. On June 12, however, it froze its customers’ assets. One month later, it filed for bankruptcy. This leaves users on the platform wondering what will happen to their assets.

With the markets in turmoil and rumors of further collapses bouncing all around, Binance gave its customers a scare in mid-June when a “stuck transaction” prevented trading on its platform. Many exchanges have been experiencing layoffs, with Coinbase laying off over 1,000 employees, crypto.com laying off over 400 people, and Bitpanda cutting 270 from its workforce.

As the smoke clears, the question we are left with…

This is all happening just as cryptocurrencies are becoming more mainstream. It shows that the cryptocurrency exchanges are undercutting one of the primary touted benefits of cryptocurrencies — that they can’t be tampered with. While it may be true that the blockchain can’t be tampered with, the fact is that the current Bitcoin blockchain is over 400 gigabytes — well beyond what an average cryptocurrency investor can spare. Therefore, investors must go through the crypto exchanges, which have none of the safeguards established for the blockchain itself. As the collapse of Celsius shows, investing in crypto via an exchange does not give you the guarantee of being able to even hold the crypto asset, much less convert it to spendable cash.

Some have called for the regulation of cryptocurrencies. However, this would remove yet another one of cryptos touted benefits — freedom from outside interference. We may wind up in a world where owning crypto doesn’t guarantee that you can access it, and doesn’t provide any freedom from outside control. At that point, what is the point of cryptocurrency in the first place? I can already do digital transactions with regular currencies, and cryptocurrencies are quickly on their way to simply being the most inefficient and dangerous means to owning unexceptional currencies.

You may also wish to read: Trudeau’s truckers reveal problems with banking infrastructure. And crypto isn’t the solution you might think it is. Even when not coerced by government actors, banks have been getting politically active in choosing whom to do business with.

Jonathan Bartlett

Senior Fellow, Walter Bradley Center for Natural & Artificial Intelligence
Jonathan Bartlett is a senior software R&D engineer at Specialized Bicycle Components, where he focuses on solving problems that span multiple software teams. Previously he was a senior developer at ITX, where he developed applications for companies across the US. He also offers his time as the Director of The Blyth Institute, focusing on the interplay between mathematics, philosophy, engineering, and science. Jonathan is the author of several textbooks and edited volumes which have been used by universities as diverse as Princeton and DeVry.

Just As Cryptocurrencies Went Mainstream — a Huge Collapse!