The cost of a single bitcoin has been dropping slowly since the end of March, alongside a broader malaise in the technology sector.
That makes sense: an investment in bitcoin is, in one regard, a bet on the possibility of further technological upheaval, just like the purchase of any other tech stock.
The immediate cause was contagion from the catastrophic failure of another cryptocurrency project, called terra, which was once valued at more than $50bn and ended the week effectively worthless.
As terra collapsed, so too did other cryptocurrencies.
It took until mid-May for the crash to stop, but while the market has regained some stability, it shows no sign of returning to anywhere near its highs of last month.
Probably.
Bitcoin fans may promote an image of their currency as a sort of “digital gold”, with a limited supply that makes it function as an effective hedge against inflation.
On top of that, the crypto economy seems disproportionally driven by retail investors, who treat the sector like a halfway house between conventional day-trading and straightforward gambling.
This “reserve-backed” model has issues – specifically, that you have to trust the company behind the stablecoin to keep the money safe and easily accessible, and not put it all on red in Las Vegas in an attempt to make a quick profit with other people’s cash.
“Just trust us” is anathema to the cryptocurrency sector, and so there has long been a push for a new type of stablecoin, one that will keep its value algorithmically rather than through the action of bankers.
That triggered what is called a “death spiral”, as investors turned terra into luna, which lowered the price of luna, which meant that the next redemption lowered the price of luna further, and so on.
At one level, the answer is simple: the winners are people who sold their cryptocurrency holdings in early April, and the losers are the people who they sold them to.
Those who held blue-chip cryptocurrencies such as bitcoin and ethereum have only lost about half their value from the peak, while those who bought “shitcoins” – low-effort projects where almost everyone involved acknowledges that the goal is simply to buy low, sell high, and leave someone else picking up the pieces – have lost a lot more.
The same holds true in other sectors of the economy: if you bought a “Bored Ape” NFT at the peak of the market, you might have trouble selling it for exactly what you paid for it, but it’s still pretty easy to resell it for more than £100,000.
But the biggest winners in all of this seem to be the corporate backers of the sector: venture-capital funds such as Andreessen Horowitz and the successful startups that have spawned repeated boom/bust cycles.
All of those technologies have come under criticism in their own ways.
That could include activists trying to receive funding to promote democracy in countries with strong capital controls – but also ransomware vendors extorting payments from schools and hospitals from nations without extradition agreements.
Even if the entire sector disappeared overnight, the avenues of contagion would be limited: the knock-on effect would have a huge hit on some conventional stocks, and investors in venture capital funds such as Andreessen Horowitz’s recent $4.5bn round of investment in cryptocurrency companies would be wiped out, but systemic effects would be unlikely.
But the crypto economy is still valued at more than $1tn, and that much wealth doesn’t disappear without causing serious pain in the real world, even if it doesn’t lead to a Lehman Brothers-style moment of banks failing.
That’s what sparked the latest conversation about us entering a “crypto winter”: yes, it’s bad, but winter comes before spring.
If everyone in the developed world either lost money in the crypto crash, or knows someone who did, the pool of naive cash to buy in next time around will be shallow indeed.
Maybe someone will have built a “play to earn” game that is actually fun, or an NFT that millions want to own.