The magnitude of the fall in the market capitalization of cryptoassets was almost four times greater than that of stock indices of developed markets between November 2021 and June 2022, which is comparable to the multipliers found in the case of margin trading or in classic derivatives of financial instruments. (futures and options contracts) or contracts for difference (CFDs), says the 10th issue of Euro Monitor.

According to the quoted source, the bursting of the speculative bubble in the cryptoasset market was marked by numerous bankruptcies and high-profile financial scandals, which once again highlighted a number of important vulnerabilities of these markets, which many economists had previously pointed out, as well as the harmful consequences of the lack of regulation of these markets for retail investors.

What led to the fall of cryptocurrencies and what stood out

An analysis of the triggers for the sharp drop in crypto-asset prices identifies two reasons:

1. First of all, the rapid deterioration of user confidence in such tools, ranging from seemingly insignificant initial events such as negative messages sent on social networks by some opinion leaders among the participants of these markets or representatives of competing companies, or simply to widespread rumors. online.

In the chain of propagation of their negative consequences, in particular, the following are highlighted:

• the extreme fragility of the concept of value associated with most categories of cryptographic assets;

• almost no management in many organizations issuing such assets;

• (paradoxical) vulnerability of mechanisms for holding and trading these assets to cyber fraud attempts;

• (no less paradoxical) dependence on intermediaries (such as cryptoasset exchanges and decentralized application platforms);

• the utopia of using automated algorithms for issuing and withdrawing assets from circulation to maintain a stable exchange rate only with the help of complex mechanisms of influence on demand and supply;

• the nature of a Ponzi scheme for digital applications/platforms to lend to crypto-assets and attract deposits at huge interest rates compared to the speed of profit that can be obtained within the traditional financial system;

• reduced benefits from long-term holdings of crypto-assets, other than speculative interest, anonymity (which is difficult to justify due to the lack of interest in evading the law) or participation in crypto-asset lending platforms (“crypto-lending”), the failure of which in recent months has exposed their nature as pyramid schemes;

• the extreme difficulty of preventing the avalanche-like withdrawal of funds from some of these categories of instruments (similar to “bank flight”) in the absence of trust, which is ensured by maintaining adequate capital and liquidity reserves, transparent and constantly checked by independent bodies (auditors, regulators).

2. In addition, the second category of triggers was the natural movement of reorientation of some capital flows originating in the classical financial system based on increased opportunity costs as a result of higher yields on fixed income instruments amid rising inflation and tightening of monetary policy by central banks in many jurisdictions , including countries with developed economies.

The fact that financial investors have reacted to the change in opportunity costs caused by the increase in interest rates becomes evident if we look at the development of the precious metals market, where one cannot speak of a crisis of confidence, but whose ownership (as in the case of crypto-assets) does not qualify for periodic interest, but, on the contrary, creates costs (for trading, safe storage, insurance, etc.).

Yes, we see, for example, the price of gold falling from a high of $2,052 per ounce on March 8, 2022 to below $1,700 per ounce on July 20, 2022. In the context of significantly ahead inflation and a high level of economic and geopolitical risks, the most likely explanation for this more than 17 percent decline in the price of gold is precisely the increase in opportunity cost determined by the trend of rising yields in fixed income instruments.