June’s 41-percent drop for the world’s largest cryptocurrency is the steepest recorded by Bloomberg data going back to 2010.
By Suvashree Ghosh and Sidhartha ShuklaBloomberg
Published On 1 Jul 20221 Jul 2022
Bitcoin, fresh off its biggest-ever monthly decline, whipsawed traders with wild swings on Friday as digital assets struggle to regain their footing.
The largest token rallied as much as 11.3% in Asia on Friday, briefly closing in on the $21,000 level. Bitcoin then quickly gave up most of those gains, trading around $19,400 at 11:30 a.m. in London. June’s 41% drop was the steepest in Bloomberg data going back to 2010.
Bitcoin’s gyrations underscore the uncertainty looming over cryptocurrencies as investors struggle to assess how far central banks will go to tame rampant inflation. Adding to the confusion, major crypto players ranging from hedge fund Three Arrows Capital to lender Celsius Network have been thrown into disarray by the market selloff, raising the prospect of further contagion.
Euro-area inflation accelerated to a fresh record in June, with consumer prices jumping a faster-than-expected 8.6% from a year earlier. Inflation numbers for the zone have outpaced economists’ forecasts for 11 of the past 12 months.
Bitcoin “could be vulnerable to one more ugly plunge that could have many traders fearing a fall towards the $10,000 area” if the turmoil on Wall Street continues in the third quarter, Edward Moya, senior market analyst at Oanda Corp., wrote in a note. The token last traded at those levels in mid-2020.
The risks aren’t deterring El Salvador, whose President Nayib Bukele said on Twitter that the nation had again bought the dip, this time adding 80 Bitcoins at a price of $19,000 each.
Earlier this week, Michael Saylor’s Bitcoin-backed tech firm MicroStrategy Inc. said in a filing it had purchased another 480 coins worth about $10 million at the height of the crypto swoon.
Bitcoin has been gyrating around the $20,000 mark after crashing below $18,000 on June 18. The lack of direction is reminiscent of how the coin traded in the wake of the TerraUSD stablecoin collapse in early May, when it clung close to $30,000 for weeks before plunging again.
When one of our students told us they were going to drop out of college in August 2021, it was not the first time we had heard of someone ending their studies prematurely.
What was new, though, was the reason. The student had become a victim of a cryptocurrency scam and had lost all their money – including a bank loan – leaving them not just broke, but in debt. The experience was financially and psychologically traumatic, to say the least.
This student, unfortunately, is not alone. Currently, there are hundreds of millions of cryptocurrency owners, with estimates predicting further rapid growth. As the number of people owning cryptocurrencies has increased, so has the number of scam victims.
Scams are not a recent phenomenon, with stories about them dating back to biblical times. What has fundamentally changed is the ease by which scammers can reach millions, if not billions, of individuals with a press of a button. The internet and other technologies have simply changed the rules of the game, with cryptocurrencies coming to epitomise the leading edge of these new cybercrime opportunities.
Cryptocurrencies – which are decentralised, digital currencies that use cryptography to create anonymous transactions – were originally driven by “cypherpunks,” individuals concerned with privacy. But they have expanded to capture the minds and pockets of everyday people and criminals alike, especially during the Covid-19 pandemic, when the price of various cryptocurrencies shot up and cryptocurrencies became more mainstream.
Scammers capitalised on their popularity. The pandemic also caused disruption to mainstream business, leading to greater reliance on alternatives such as cryptocurrencies.
A January 2022 report by Chainanalysis, a blockchain data platform, suggests in 2021 close to $14 billion was scammed from investors using cryptocurrencies.
For example, in 2021, two brothers from South Africa managed to defraud investors of $3.6 billion from a cryptocurrency investment platform. In February, the Federal Bureau of Investigation announced it had arrested a couple who used a fake cryptocurrency platform to defraud investors of another $3.6 billion
You might wonder how they did it.
There are two main types of cryptocurrency scams that tend to target different populations.
A recent example is SQUID, a cryptocurrency coin named after the TV drama Squid Game. After the new coin skyrocketed in price, its creators simply disappeared with the money.
A variation on this scam involves enticing investors to be among the first to purchase a new cryptocurrency – a process called an initial coin offering – with promises of large and fast returns. But unlike the SQUID offering, no coins are ever issued, and would-be investors are left empty-handed. In fact, many initial coin offerings turn out to be fake, but because of the complex and evolving nature of these new coins and technologies, even educated, experienced investors can be fooled.
As with all risky financial ventures, anyone considering buying cryptocurrency should follow the age-old advice to thoroughly research the offer. Who is behind the offering? What is known about the company? Is a white paper, an informational document issued by a company outlining the features of its product, available?
In the SQUID case, one warning sign was that investors who had bought the coins were unable to sell them. The SQUID website was also riddled with grammatical errors, which is typical of many scams.
The second basic type of cryptocurrency scam simply uses cryptocurrency as the payment method to transfer funds from victims to scammers. All ages and demographics can be targets. These include ransomware cases, romance scams, computer repair scams, sextortion cases, Ponzi schemes and the like. Scammers are simply capitalising on the anonymous nature of cryptocurrencies to hide their identities and evade consequences.
In the recent past, scammers would request wire transfers or gift cards to receive money – as they are irreversible, anonymous and untraceable. However, such payment methods do require potential victims to leave their homes, where they might encounter a third party who can intervene and possibly stop them. Crypto, on the other hand, can be purchased from anywhere at any time.
Of course, younger adults can also be vulnerable and indeed are becoming victims, too. There is a clear need to broaden education campaigns to include all age groups, including young, educated, well-off investors. We believe authorities need to step up and employ new methods of protection. For example, the regulations that currently apply to financial advice and products could be extended to the cryptocurrency environment. Data scientists also need to better track and trace fraudulent activities.
Cryptocurrency scams are especially painful because the probability of retrieving lost funds is close to zero. For now, cryptocurrencies have no oversight. They are simply the Wild West of the financial world.
Yaniv Hanoch is an Associate Professor in Risk Management at the University of Southampton. Stacey Wood is a Professor of Psychology at the Scripps College.
Since the invention of Bitcoin in 2009 the global cryptocurrency market has grown from nothing to a value of around $2 trillion. From a price of $1 in 2011, Bitcoin rose to an all-time high of more than $63,000 in April 2021 and now hovers around the $42,000 mark.
Large fluctuations in cryptocurrency prices are common, which makes them a highly speculative investment. What kind of people are willing to take the risk, and what motivates them?
We conducted a survey to find out. In particular, we wanted to know about the relationship between the so-called “dark tetrad” personality traits and attitudes towards cryptocurrency.
In psychology, the “dark tetrad” refers to a group of four personality traits. These are Machiavellianism, narcissism and psychopathy (together known as the “dark triad”), plus sadism.
They are called “dark” because of their “evil” qualities: extreme selfishness and taking advantage of others without empathy. The dark tetrad are also often related to risk-taking behaviours.
Appeal of cryptocurrency
We identified two main areas of appeal. First, the high risks and high potential returns of crypto trading make it attractive to the kind of people who like gambling.
Second, cryptocurrencies are not issued or backed by governments like traditional or “fiat” currencies. This makes them attractive to people who distrust the government.
Crypto buyers’ personalities
We asked 566 people to complete online personality surveys as well as answer questions about their attitudes to crypto and whether or not they planned to invest in it. Of our participants, 26% reported they own crypto and 64% showed interest in crypto investing.
We measured their dark tetrad traits using standard psychological tests. We also measured traits that might connect the dark tetrad to judgements about crypto: fear of missing out (the feeling that others are experiencing better things than you are), positivity (the tendency to be positive or optimistic in life) and belief in conspiracy theories.
Reason to invest
A common reason to invest in crypto is the hope of earning high returns. Beyond the desire to build wealth, our research shows dark personality traits also drive crypto buying.
Machiavellianism is named after the Italian political philosophy of Niccolò Machiavelli. People who rate highly on this trait are good at deception and interpersonal manipulation.
Machiavellians take a calculated approach to achieving goals, and avoid impulsive decisions. They are less likely to engage in problem gambling.
Machiavellians also tend to believe strongly in government conspiracies. For example, they often believe politicians usually do not reveal their true motives and that government agencies closely monitor all citizens.
We found Machiavellians like crypto primarily because they distrust politicians and government agencies. Many crypto supporters believe governments are corrupt, and crypto avoids government corruption.
Narcissists tend to focus on the positive side of life. We found narcissists like crypto because of their great faith in the future, and because of their confidence their own lives will improve.
Everyday sadism relates to a personality enjoying another’s suffering. Sadists often display aggression and cruel behaviours. For example, sadists troll others on the Internet for enjoyment.
At first glance, buying crypto is unlikely to harm others. However, we found sadists like crypto because they do not want to miss out on investment rewards either. To them, perhaps both the pleasure from seeing another’s pain and the fear of missing out are related to selfishness.
Unlike narcissists, we found both psychopaths and sadists lack positivity about their prospects, which cancels out their liking of crypto.
Studying cryptocurrency through the psychological lens of the dark tetrad offers insight into why people want to buy crypto. We are not suggesting that everyone interested in crypto displays dark tetrad traits.
We studied only a subset of people interested in crypto who do have these traits. If you happen to be a Bitcoin or other crypto holder, you may or may not exhibit them.
Cryptocurrency alone will not allow Russia to skirt a barrage of sanctions aimed at punishing Moscow for invading Ukraine, cryptocurrency analysts told Al Jazeera.
The United States, United Kingdom, European Union and Canada announced new sanctions on Monday, this time targeting Russia’s central bank and national wealth fund. The US Treasury Department said that it was limiting Russian President Vladimir Putin’s ability to use the country’s $630bn in foreign reserves.
The move came just a day after the US and its allies cut off some Russian banks from SWIFT (the Society for Worldwide Interbank Financial Telecommunication), a secure messaging network used for trillions of dollars worth of transactions.
Russia’s economy was already reeling on Monday. The ruble plunged to an all-time low, the central bank raised its key interest rate to 20 percent, and the stock exchange stayed closed.
Enforcing sanctions requires the ability to track transactions – typically through the banking system. Iran and North Korea have both used cryptocurrencies, which operate outside the confines of the financial system, to get around sanctions.
“Crypto can be used to evade sanctions and hide wealth,” Roman Bieda, the head of fraud investigations at Coinfirm, a blockchain risk management platform, told Al Jazeera.
But crypto experts told Al Jazeera Russia’s case is different, with the country having less wiggle room due to the scale of the economic blow and its limited adoption of digital currencies.
Replacing hundreds of billions of dollars
Unlike North Korea, Venezuela and Iran, Russia has been deeply ingrained in the global financial system for decades, Ari Redbord of TRM labs, a blockchain intelligence company, told Al Jazeera. Eighty percent of its daily foreign exchange transactions and half of its international trade are conducted in dollars.
“It is very difficult to move large amounts of crypto and convert it to usable currency,” Redbord said. “Russia cannot use crypto to replace the hundreds of billions of dollars that could be potentially blocked or frozen.”
Measures are also in place to stop the evasion of sanctions via crypto. On a blockchain ledger – where cryptocurrency exchanges are posted – every transaction and the address associated with it are viewable to the public.
Coinfirm’s Bieda told Al Jazeera that while sanctioning governments cannot know who the owner of the address sending crypto is, they can see the flow volume — in other words, the amount of money that is moved. Once a suspicious address is flagged, those funds can be monitored.
Mining crypto with surplus energy is an option but not enough
Oil and gas are one sector of Russia’s economy that has not been targeted by the sanctions, though companies including Shell and BP have announced they are pulling their business out of the country.
Russia is one of the world’s largest oil exporters – 25 percent of European oil comes from Russia, according to Rystad Energy, an Oslo-based research firm. The country also supplies about 40 percent of Europe’s natural gas.
If future sanctions do target the energy sector, Moscow could emulate Tehran by using surplus energy or computing power to generate cryptocurrency, Tom Robinson, co-founder of Elliptic, a London-based blockchain analysis provider, told Al Jazeera.
“Cryptocurrency mining allows them to monetise their energy reserves on the global market, without having to actually move them outside the country,” said Robinson.
But that would likely be just a drop in the bucket for a major crude and gas exporting power like Russia.
For the moment, sanctions on oil and gas appear unlikely, Rystad Oil analyst Louise Dickson told Al Jazeera.
“A supply disruption of up to 5 million barrels per day of Russian oil would not only deepen the already fragile energy crisis globally, it may be interpreted by Russia as an act of war,” she said.
Diminishing the dollar’s global role
The US Treasury Department recently warned that digital currencies and alternative payment platforms could undermine the effectiveness of US sanctions.
According to blockchain data platform Chainalysis, roughly 74 percent of ransomware revenue in 2021 — more than $400m worth in cryptocurrency — went to entities “highly likely to be affiliated with Russia in some way”.
New technologies have enabled malicious actors to hold and transfer money outside the traditional dollar-based financial system, according to the Treasury Department, while empowering “adversaries seeking to build new financial and payments systems intended to diminish the dollar’s global role”.
Although the sanctions against Russia are designed to put pressure on Moscow, they may hasten the arrival of the new financial order the US has warned about, Ryan Selkis, founder of crypto research firm Messari, told Al Jazeera
“Russia getting kicked out of SWIFT and losing access to its reserves will accelerate the de-dollarization of trade,” said Selkis. “I don’t think the West believes the dollar will ever be displaced.”
Memories of 2018 are sparking fears that a repeat is playing out now after the world’s largest cryptocurrency plummeted 50 percent from its most recent high of almost $69,000 in November.
There are few things scarier for investors than a bear market — unless you’re involved in crypto, in which case a winter is worse.
The chilling term refers to a sharp slump, followed by a drop-off in trading and months of market doldrums — a phenomenon that memorably befell the crypto market in 2018. Bitcoin’s price plunged by more than 80% to as low as $3,100 from the end of 2017 through December of the following year, a period characterized by the boom-and-bust of initial coin offerings and several big banks shelving their plans to start cryptocurrency trading desks. Bitcoin wouldn’t reach a new high until December 2020, according to data compiled by Bloomberg.
Memories of 2018 are sparking fears that a repeat is playing out now after the world’s largest cryptocurrency plummeted 50% from its most recent high of almost $69,000 in November. The crypto universe has shed more than $1 trillion in market value on growing conviction that the Federal Reserve is set to start ratcheting back the ultra-accommodative policy settings that fueled a boom in risk assets. The pullback has hit all corners of the crypto ecosystem, from Bitcoin to memecoins and publicly listed crypto exchanges. While the collapse has been rattling enough on its own, it has spawned an even bigger concern that the pain may persist for many months, according to UBS.
“There’s this question of how do we characterize that and the nearest analogy is probably 2018, which is this idea of a crypto winter,” James Malcolm, head of foreign exchange research at UBS, said by phone. “It looks likely to be a fairly difficult and potentially prolonged period and therefore, the crypto winter analogy is quite good. Remember, the crypto winter in 2018 wasn’t just over the Northern Hemisphere winter months. It basically extended for a whole year — so it was a crypto winter that lasted effectively a year.”
Bitcoin on Tuesday continued to decline, falling as much as 3% to trade at $35,721. The coin has spent more than 60% of the year so far trading lower, posting only nine sessions in the green.
Mentions of “crypto winter” and “crypto ice age” have flooded social media amid the latest drop. “Gm gm — make sure you stay warm, crypto winter is in full force,” Twitter user @brycent_ posted on Monday, using the crypto shorthand for “good morning” to start his tweet. “Enjoy this #bitcoin winter,” user @mir_btc tweeted over the weekend.
To Antoni Trenchev, co-founder and managing partner at Nexo, there’s a definite chill in the air. Bitcoin has already satisfied half of his two-part crypto-winter definition: a sharp decline in prices.
“I’m not looking for a re-run of the last ‘crypto winter,’” he said. “Undeniably, there are regulatory and macro storms ahead, and another leg down to $28,000-$30,000 can’t be ruled out in the current risk-off climate.”
Unlike the winter of three years ago, investment in the crypto-sphere remains robust — at least for now. In January alone, crypto-exchange FTX announced the launch of a $2 billion venture fund to target Web3 opportunities, while the Financial Times reported that Andreessen Horowitz is looking to raise $4.5 billion for crypto funds. Of course, a prolonged slump could douse enthusiasm for the sector.
Outside of venture capital, companies are also looking to expand into corners of the crypto ecosystem. Filings with the U.S. Patent and Trademark Office show that Walmart Inc. is preparing to create its own cryptocurrency and non-fungible tokens. Meanwhile, GameStop Corp. reportedly is also planning to launch an NFT marketplace for gamers by the end of the year.
To Tacen Inc.’s Budd White, that momentum is a sign that the crypto complex is in the midst of repricing, rather than a freeze.
“I don’t believe we are entering a crypto winter because there is still increasing momentum on the build-side — we are just seeing more realistic pricing of what is currently built,” said White, chief product officer and co-founder at the software development company that builds open-source, blockchain-based software.
The looming threat of intensified regulatory action adds to the risks embedded in the crypto complex. The Fed is considering the launch of its own digital currency, while crypto mining’s energy use has attracted scrutiny from the U.S. Congress and foreign governments.
“The White House may soon unveil some national security challenges posed by cryptocurrencies and the Fed’s paper on central bank digital currencies didn’t answer any questions on if we will see a digital dollar or how they could work with stablecoins,” said Edward Moya, a senior market analyst at Oanda Corp. “The regulatory environment got a lot cloudier now.”