Cryptocurrency, an emerging form of digital payment, is in crisis. Cryptocurrencies crashed after Celsius, a crypto loan company with $12 billion in assets under management, paused account withdrawals and transfers due to “extreme market conditions.” The move raised concerns about the company’s solvency and how the greater crypto market could be affected.
This comes shortly after two cryptocurrencies terraUSD and LUNA failed in a $60 billion meltdown. Bitcoin, Ether, and other cryptocurrencies plunged. The crash has led to $2 trillion in losses this year. Cryptocurrencies rallied briefly but hit a snag again after the Fed announced the biggest interest rate hike in 28 years with plans for further increases.
What is cryptocurrency?
Cryptocurrencies are digital assets—often referred to as tokens or coins—that use secure blockchain ledgers. Cryptocurrencies have fluctuating prices, making them less desirable than fiat money. Additionally, they are not issued or backed by the government or a central bank. Examples of popular cryptocurrencies include Bitcoin, Ethereum, Tether, USD Coin, and Binance Coin.
Many experts in finance and technology have debated the long-term viability of crypto because there is no full faith and credit of the U.S. Treasury behind it. Anyone can mint crypto coins out of thin air if they have the computer power and can afford the electricity.
The greater fool theory
Bill Gates, the co-founder of Microsoft, says cryptocurrencies are based on the greater fool theory. This theory is the idea that in a market bubble (i.e., when market value rapidly escalates), one can make a profit by purchasing overvalued assets and selling them later to a “greater fool.” Suze Orman, an American financial advisor, warned investors to be careful buying crypto as the market dips. Paul Krugman, an American economist and opinion columnist for The New York Times, and Jim Chanos, an American investment manager, have reportedly said the crypto crash is evidence that the crypto market is built on hype and speculation.
Others, however, believe there is a silver lining to the crash. Mark Cuban, an entrepreneur and investor in Dogecoin, says the current market activity will clean up the cryptocurrency ecosystem, allowing the truly valuable companies to rise to the top.
In the Classroom
This article can be used to discuss cryptocurrency (Chapter 15: Money and the Financial System).
What is cryptocurrency?
What is the greater fool theory?
What factors contributed to the crypto crash?
This article was developed with the support of Kelsey Reddick for and under the direction of Geoffrey Hirt, O.C. Ferrell, and Linda Ferrell.
Eddie van der Walt, "Five Things You Need to Know to Start Your Day," Bloomberg, June 16, 2022, https://www.bloomberg.com/news/newsletters/2022-06-16/five-things-you-need-to-know-to-start-your-day
Ryan Browne, "Bill Gates Says Crypto and NFTs Are ’100% Based on Greater Fool Theory’," CNBC, June 15, 2022, https://www.cnbc.com/2022/06/15/bill-gates-says-crypto-and-nfts-are-based-on-greater-fool-theory.html
Ryan Browne and Arjun Kharpal, "Crypto Lender Celsius Pauses Withdrawals Due to ‘Extreme Market Conditions’," CNBC, June 13, 2022, https://www.cnbc.com/2022/06/13/crypto-lender-celsius-pauses-withdrawals-bitcoin-slides.html
Theron Mohamed, "‘Big Short’ Investor Michael Burry, Paul Krugman, and Mark Cuban Have Weighed In on the Crypto Crash. Here’s What 7 Market Watchers Say About the Sell-off," Markets Insider, June 25, 2022, https://markets.businessinsider.com/news/currencies/big-short-michael-burry-krugman-cuban-crypto-price-market-crash-2022-6