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Cryptocurrency Is in a Death Spiral. What the Hell Is Going On?

by | Jun 20, 2022 | Crypto, Money

I’m a crypto grandpa.

Since 2013 I’ve lived, breathed, and snorted every bit of crypto information I can. The difference is I see crypto in a different light than many.

The huge price crashes of 2018 and 2020 (especially) did that to me. Let me explain what’s going on without all the hyperbole and jargon.

A USD crypto scam fell apart

One crypto called UST fell apart a few weeks again.

UST is a crypto version of the US dollar. 1 USD = 1 UST. Instead of selling your Bitcoin or Ethereum and leaving the crypto system, UST allows you to sell one crypto and sit in USD without friction.

Crypto day traders use US dollar cryptos all the time.

One greedy young man named Do Kwan helped come up with UST. Turns out it was set up badly. When a few smart people decided to attack the crypto and see if they could make one UST worth less than one USD, they succeeded.

As humans always do, we panicked. The panic selling tanked the 1 for 1 peg even further. Now UST is worth peanuts.

Big investment firms and well-known investors had money invested in Terra.

I had a small amount of money invested in Terra Luna (the project behind UST). Why? I like to place small bets on popular cryptos for fun. That investment is now dead for everyone — even me.

Terra Luna tried to start again with a Version 2. That fell apart as well.

When the 8th largest cryptocurrency in the world falls apart, it’s similar to the collapse of investment firm Lehman Brothers in the 2008 recession. It becomes a contagion.

The replacement for a savings account failed

US dollars earn you a bee’s d*ck amount of interest with a bank.

A company called Celsius decided to bring out a crypto savings account. You lock up your crypto with them and they pay you interest. Nice.

A week ago I just finished building a course that mentioned Celsius.

Then sh*t hit the fan.

Celsius froze all their customer’s deposits. Why? They got partly exposed to the Terra Luna blow-up.

Everything in finance and crypto is connected. Systemic risk can mean when one domino falls, so, too, do many other dominos. This is exactly what we saw in the 2008 recession.

One Wall Street big kahuna falls over, then more collapse.

Now that Celsius is likely dead there will be more cryptos to collapse. We’ll have to play this game for a while.

Cryptos collapse for an extremely good reason…

Most of them are scams.

I’ll say it until I’m blue in the face. Everything outside of Ethereum and Bitcoin is unproven. In the 2018 crash many big-name cryptos lost most of their value. The majority have never gone back up again.

There are two types of crypto folks:

1. Dreamers

They buy new cryptos thinking they’re going to become trillion-dollar companies that disrupt Apple. Yet the crypto solves a problem 99% of people don’t care about.

Altcoins are just startups with an idea and no revenue.

2. The OGs (Original Gangsters)

They look for:

  • Profits/cashflows
  • Network adoption
  • Which humans are behind the crypto
  • The rate of new developers joining the project
  • How long owners of the crypto hold the coin for
  • How much centralization versus decentralization there is

Their largest investment is normally in blue-chip cryptos: Bitcoin and Ethereum.

Global events take years to affect financial markets

One of the coolest things I ever learned was that the 2001 September 11th terrorist attacks caused the 2008 recession.

Morgan Housel shares the full story in his book “The Psychology of Money.”

When coroni-rona hit in 2020 everything collapsed. Crypto plummeted. Within months the whole market recovered and roared ahead.

This strange reality made many investors complacent.

What most people missed is that 40% of all US dollars were created out of thin air to pay for the fallout of coroni-rona. So with all the free cash, of course, markets recovered.

The full after-effects of an event like coroni-rona take years to play out. Just like what happened with the 911 and the 2008 crisis.

A game of musical chairs

All the free money couldn’t last forever.

The US has slowly turned off the money printer that allowed all those delicious stimmy checks to get handed out.

Now it’s time for all of us to pay up. Buy now, pay later.

A game of musical chairs in financial markets (Image Credit-Wikimedia creative commons)

Interest rates have begun to rise, because, let’s face it, 0% interest rates aren’t sustainable…dahhh.

As interest rates go up the cost of debt becomes more. And what happens during good times? People borrow like crazy to buy more assets and get rich so they can retire and sit on a beach with a pina colada.

Interest rates going up make markets go down.

The US Federal Reserve has tried to play this game of hokey pokey before back in 2018.

It failed.

While most think interest rates will keep going up, I disagree. In the next few rate rises markets will tank so badly that the strategy won’t work. And don’t forget the mid-term elections are coming up for our politicians.

It’s hard to run a political campaign when the markets are crashing and everyone feels poor.

So what Joker card can the US pull out of the hat? Simple.

Create more money out of thin air and stop raising interest rates — or even, lower them again!

Crypto is linked to the global economy.

If the stock market does badly then so does crypto. To think the industry sits alone on its own island of privilege and safety is a ridiculous thought.

So it’s no surprise with all the craziness on Wall Street that crypto has gone down too. But if the 2020 money printer gets turned on once more and interest rates stop going up or go lower, it’s good times and great classic hits again.

If not, then the crypto market will be slow for a while as the recession does its thing and punishes the greedy buggers.

A recession is what happens after two quarters of negative GDP. In the next few weeks we will find out if we’re officially “in recession.”

It’s pretty obvious we are.

Out of control inflation

For investors to buy crypto they need money.

Right now inflation is at 8.6% in the US. Gas prices are through the roof. Food costs a small fortune. So when we have less money there’s no spare cash to put into crypto.

At the same time, large institutions that have slowly started to invest in crypto had to pull out. Why? During risky times high-risk assets like crypto get sold.

None of this is a surprise if you’ve worked in finance. It’s how it works.

What I’m doing during the chaos

Timmy Boy would normally be buying Bitcoin and Ethereum like a drunken sailor right now. But he has a tax bill to take care.

As soon as that’s out of the way, I will be Dollar-Cost Averaging more money into Bitcoin and Ethereum. All this means is I invest the same amount every month. Some months the price is high. Some months it’s low. But it averages out overall for a smooth entry point into the market.

I will still:

  • Invest in small cryptos for fun
  • Read about crypto from experts
  • Be part of the cyberpunk crypto culture
  • Share what I’ve learned for those who want to learn
  • Ignore ignorant, pessimistic people who refuse to see the technological future Bitcoin and Ethereum have already created (crypto, NFTs, Defi, Metaverse)

What you can do

A recession is likely so…

Don’t invest money you don’t have into crypto. Have plenty of cash to take advantage of the discounts. Ignore the crypto skeptics who come out of the woodwork for their 15 minutes of fame (and make $0). Keep debt under control. Stay clear of the buy now, pay later scam.

And most of all, be kind to one another. The chaos is going to get worse before it gets better. After a winter bear market comes spring again.

Closing thought

Follow the doomsdayers and you’ll enter Brokeville. Stick with the optimists and you’ll make life-changing money. Carefully curate your content diet to avoid clickbait end-of-America viruses from entering your brain.

The next period of crypto growth is going to be bloody exciting. Stay safe.

This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.

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