The impact of the cryptocurrency crash on businesses
By Mark Eckerle, HLB USA
If there's one word that describes cryptocurrency, it's volatile. The prices of cryptocurrencies soar and then seem to shrink almost as quickly. Bitcoin, for example, fell from $30,000 to about $23,500 (a decline of about 23%) in just a four-day period in early June. Over the same time, Ethereum declined by over 31%, and seemingly the cryptocurrency market has been shrinking this year. But what's fuelling this decline? How does this impact businesses?
Why are cryptocurrencies so volatile?
Cryptocurrencies have only been around for a short time—they're still in the price discovery phase. This means that crypto prices will continue to fluctuate as governments, users, and investors address the initial growing pains or concerns until prices stabilise. As cryptocurrencies become more widely used and there are more and more use cases to transact with cryptocurrencies, over time the volatility may decrease, and you'll begin to see cryptocurrencies gain some form of stability.
Another reason why crypto is volatile is that it has no backing from any currency or commodity. Unlike traditional investment tools, such as company stocks, where price movements may well be influenced by the business's performance, cryptocurrencies have no underlying asset. This means the movements in their prices are purely based on speculation among investors about whether they will fall or rise in the future. As a result, there can be violent swings in the price of crypto, even in the space of 24 hours.
Crypto crash—what happened?
The cause of the recent downturn in the crypto markets may be a result of a few events that all transpired around a similar time that led the market to where it is today. These events include:
Rising inflation
With the cost of everyday items like groceries and gas increasing, investors started pulling their money out of investments they deemed risky, including cryptos. As investors sold off their digital assets, the price of cryptocurrencies fell further.
Market correction
In addition, the crypto market over the last two years went through significant growth, with Bitcoin climbing as high as approximately $65,000 per token, up from $3,000 in March 2020. This type of rapid growth is usually unsustainable so a pullback was expected at some point. When an asset rises very quickly in price and surges to a record high, this makes a crash much more likely—or at least a correction, which is when the price goes back down to a more "normal level".
Terra-Luna crash
The ultimate trigger of the cryptocurrency crash may have been the events that transpired surrounding Terra in May 2022. Terra is a stablecoin designed to minimise volatility in the crypto market by maintaining a fixed value over time. Unlike other stablecoins, however, Terra wasn't pegged to a stable asset like the dollar or gold. Instead, its stability depended on algorithms tied to its sister cryptocurrency called Luna. When the valuation of Luna shrunk from about $80 at the beginning of the month to less than two cents, Terra's followed suit.
The Terra-Luna crash triggered a panic in the market and caused public distrust. Investors wanted to transfer their cryptocurrencies held at third-party financial institutions to their own wallets. Many of the financial institutions holding deposits of customers were over-leveraged with large outstanding loans in cryptocurrencies and this type of run-on-the-bank behaviour caused many large businesses to become insolvent over time since their assets couldn't handle the liabilities for their customers.
Impact for business
The impact the crypto crash has on a business is that, as an investor, there's an inherent risk with such a new asset class. If you have cryptocurrency stored in a wallet you don't have the private keys for, such as a wallet in an exchange, is it really yours? Many investors may say it isn't. This idea is encapsulated in one of the famous mantras of the crypto world: "Not your keys, not your coins".
The philosophical reasons for keeping your crypto currencies in a wallet you control are simple. Cryptocurrencies were created in response to a money and banking system that centralises power away from the person. With this in mind, entrusting your funds to a third-party company certainly goes against the ethos that cryptocurrencies were built on. However, there are also some drawbacks to handing over control of your funds to a third party. These include:
Loss of control
If you keep your cryptocurrencies on an exchange or third party, you're basically relinquishing control of your own coins. This means that anything you want to use cryptos for will be mediated by that third party. Not having direct control of your coins can cost you a lot. For instance, if an exchange you store your cryptocurrencies on freezes withdrawals or trading of a coin you own due to upgrades, maintenance, or any other reasons, you'll be helpless to act when there's a volatile market activity.
Security risks
If you're holding your cryptocurrencies at a third party, then you don't own those tokens. Hence, you can be the victim of a cyberattack or potentially fraudulent activity as you're putting your trust in the employees working at those institutions. As of 2022, there have been about 45 exchange hacks that resulted in cumulative losses of about $1.85 billion. Perhaps the most notorious was the 2014 hack of Mt. Gox, a bitcoin exchange platform, which resulted in the theft of over $460 million of users' funds.
Even if you don't become the victim of an exchange hack, there's always a risk that cybercriminals will manage to drain your personal account on an exchange or that your personal information will be comprised.
Should you invest in cryptocurrencies?
Cryptocurrencies remain a highly speculative investment tool. If you have a high tolerance for risk, it may be a good idea to diversify your portfolio with a percentage of cryptocurrency right now. However, make sure you assess your overall budget and high-interest revolving debt first.
If you know more about protecting your investment in cryptocurrency, get in touch with one of our industry experts today. At HLB, we can provide you with the practical services you need to grow your business.
