The value of several cryptocurrencies, including Bitcoin, has plummeted in recent months. Credit: Unsplash.

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Cryptocurrency collapse and dot-com déjà vu

The dot-com crash of the early 2000s lurks in the memories of many seasoned Wall Street investors. Two decades on, some are comparing that event to the current slump in cryptocurrencies. We analyse whether this is just another downturn in a particularly volatile market or another tech bubble about to burst.

ISABEL RUBIO ARROYO | Tungsteno

 

The collapse of cryptocurrencies in recent weeks has shaken the faith of those who believed in the bright future predicted by some big investors. While Bitcoin seemed to have no ceiling in November 2021, a few weeks ago its value had fallen by more than 50%. And the situation looks no better for other cryptocurrencies such as Ether or Luna either. Although these currencies have suffered big drops in the past, there are those who predict that now is the beginning of the end. Are we facing another tech bubble comparable to that of the dot-coms in the early 2000s?

 

An unprecedented crash

 

A few weeks ago, the worst predictions of some crypto-sceptics came true. In early May, owners of the cryptocurrency Luna saw their digital assets lose 99% of their value—from $80 to less than 10 cents—in just 72 hours. Both Twitter and Reddit were filled with posts from investors who lost much of their savings in the blink of an eye. "My friend […] tried to commit suicide this morning. He basically moved all his savings to crypto in 2021 and LUNA was a major player in his portfolio," one user commented on the forum.

Faced with the flood of such messages, the co-founder of Terra (the foundation responsible for the Luna cryptocurrency), South Korea's Do Kwon, tried to calm those affected with a message on Twitter: "I understand that the last 72 hours have been extremely tough on all of you - know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this. Together." A few weeks later, Kwon attempted to resurrect the cryptocurrency. The decision has not been without controversy.

 

The cryptocurrency Luna lost 99% of its value in just 72 hours in early May. Credit: Wall Street Journal.

 

The loss of confidence among many users also translated into further declines in other cryptocurrencies such as Solana and Cardano. While Bitcoin's price plummeted to its lowest point since 2020, Ether's price fell 30% in a week. "I never thought things would get ugly this fast," Ed Moya, a cryptocurrency analyst at trading firm OANDA, told The New York Times. Some even compared the crisis to the start of the 2008 financial crisis.

 

A bubble about to burst?

 

Although celebrities such as Kim Kardashian and tech moguls such as Elon Musk and Jack Dorsey have shown interest in cryptocurrencies, this collapse has highlighted the risk of investing in experimental and unregulated digital currencies. There are few reliable metrics to assess whether the excitement around a cryptocurrency is justified or a bubble about to burst.

More and more people have acquired cryptocurrencies and even some large banks allow cryptocurrencies to be traded. A Pew Research Center survey reveals that 16% of Americans now own some, up from 1% in 2015. Moreover, seven in ten institutional investors expect to buy or invest in digital assets in the future, according to a 2021 study. "As [the sector] became 'just another asset', it began to be affected by the same macroeconomic factors that influence traditional markets," finance experts Andres Urquhart and Brian Lucey tell The Conversation. Both the war in Ukraine and rising oil prices have "acted as a drag on cryptocurrencies in recent months."

 

Dot-com déjà vu

 

The dot-com crash haunts the memories of some seasoned Wall Street investors, and some are comparing that event to the current slump in cryptocurrencies. George Ball, chairman of investment firm Sanders Morris Harris, tells Fortune that "there’s a very strong similarity between the dot-com crash and the bear market that we’re experiencing today." "You would have thought that investors, broadly, professional or retail, would have learned their lesson in 2000. And yet, something eerily alike has happened," he says.

 

Some experts have compared the cryptocurrency collapse to the dot-com crash of the 2000s. Credit: CNBC Television.

 

Urquhart and Lucey note that, in response to these comparisons, crypto enthusiasts argue that the basic premise of dot-com stocks was correct—the internet was indeed the future. "They believe the same is true of bitcoin, predicting that the sector will recover," they say. "Economists have studied bubbles for centuries, however, and evidence shows many assets never recover nominal price highs after the market bubble bursts."

It is too early to assess whether this decline is simply another downturn in the volatile cryptocurrency market or the beginning of the end for this alternative asset class. Urquhart and Lucey see cryptocurrency investing as a rollercoaster ride with big gains followed by sudden drops. While "some see this market correction as a great time to 'buy the dip', others believe this is the end of the party for cryptocurrencies."

 

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Tungsteno is a journalism laboratory to scan the essence of innovation. Devised by Materia Publicaciones Científicas for Sacyr’s blog.

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