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Crypto Crash Underscores New Realities.

Updated: Aug 12, 2022

When the Dow loses a few hundred points in a week or two, the drop spurs plenty of hand-wringing— but no one seriously suggests that the heyday of the stock market is ending.

A run of bad days in the crypto market? Some start questioning the entire future of digital assets.

Of course, the drubbing that crypto has taken in recent weeks and months is more dramatic than losses in the S&P 500 or Nasdaq. According to CoinGecko, a compiler of crypto data, the market cap of the entire cryptocurrency market has dropped by more than 50 percent and is now worth around $1.3 trillion, relative to a high of $3 trillion in November. As a yardstick, major stock market indices have fallen around 20 percent since the beginning of 2022[1].

Although people are concerned about the stock market losses, they’re gripped by panic about what’s happening to cryptocurrencies like Bitcoin. As of Tuesday, May 17th, the Crypto Fear and Greed Index was registering “extreme fear,” a sentiment that remained unchanged since the previous week. [2]

Even the staid New York Times used dramatic language to describe what was happening in crypto markets. In a May 12th article, the newspaper wrote: “The crypto world went into a full meltdown this week in a sell-off that graphically illustrated the risks of the experimental and unregulated digital currencies.” [3]

Today's Crypto Crash: Why Is It Different?

Bitcoin— the most well known and widely held cryptocurrency— has crashed before and rebounded again, most notably in 2018.

One key difference in this crypto crash is that even large financial institutions like Bank of America own digital assets, and crypto is held by many more Americans nowadays than even a few years ago. According to a Pew Research Center survey, 16 percent of Americans own some virtual currency— up from a mere one percent in 2015[4]. So when digital assets lose value in 2022, the effects are felt far more widely.

In addition, many experts acknowledge that the American economy is facing unsettling times. Inflation hit 8.5 percent in March, representing a 41-year high.[5] This year, the Federal Reserve began raising interest rates to fight inflation and more hikes are on the horizon. These macro factors are increasingly being felt in the crypto world.

The current crypto crash is also attracting attention because it affected stablecoins, which are, according to Investopedia, “cryptocurrencies the value of which is pegged, or tied, to that of another currency, commodity or financial instrument.” [6] In other words stablecoins are supposed to be far less prone to crashes than other digital assets because they are pegged to the US dollar, gold, or another traditional source of value.

In May, the Luna cryptocurrency and its associated stablecoin terraUSD (UST) crashed. The UST coin was designed to maintain a value of $1 at all times, but on May 9th, its value fell to just 17 cents.[7]

UST is, however, not a stablecoin in the classic sense. While many stablecoins are backed by a government-issued currency, it is backed by an algorithm.

Some Do’s and Don’ts

When it comes to crypto banking, a few messages are becoming clearer:

  • Do continue to educate yourself. “Crypto is a lot of things – including completely confusing,” writes the New York Times.[8] For this reason, it’s important for bankers to educate themselves about digital assets. A good place to start is RiskScout’s recent webinar: “What Bankers Need to Know about Crypto.”

  • Do listen closely to what the regulators are saying. On Monday, SEC Chair Gary Gensler said that investors in cryptocurrency assets need more protections so they can trust in these markets. The SEC, said Gensler, will continue to be “a cop on the beat” to help put safeguards for cryptocurrencies in place.[9]

  • Don’t get too caught up in exuberance or despair. Traditional advice to all traders— avoid behaving emotionally— applies to the crypto world, as well. Bitcoin, for instance, crashed in 2018, when its price dro