Crypto

Lessons Learned from the Crypto Collapse

Lessons Learned from the Crypto Collapse

The crypto markets are down… bad. 

Turns out: the collapse of one of crypto’s largest blockchains doesn’t fare too well for the whole of the crypto ecosystem. In case you’re out of the loop, the collapse of the Terra blockchain and its beleaguered stablecoin TerraUSD, sent crypto to lows not seen since July 2021.

The reason why is fairly complicated, but – in short – Terra’s unofficial relationship with Bitcoin was what toppled crypto’s strength. Terra’s Luna Foundation Guard, an organization set up to ensure the stability of its ecosystem, owned over $1 billion worth of Bitcoin. They sold most of it attempting to shore up their struggling stable.

And not only did they fail to do so – but they killed Bitcoin’s price in the process. The rest of the market largely follows Bitcoin… so you can put two and two together for yourself.

Could Crypto ever lose its status as the king of crypto? Keep reading.

So, is crypto collapsed? Apparently not. 

Is it down on its luck? Absolutely, but everything is.

Crypto was moving in sympathy with tech stocks, namely the large-cap members of the Nasdaq-100, even before the Terra fallout. Check out how the Nasdaq-100 ($QQQ) and the price of Bitcoin have trended since Dec. 2021:

Price of bitcoin and $QQQ Correlation

Correlation between the price of Bitcoin and $QQQ since 2021.

However, crypto is just as much of a business as stocks are – blockchains, protocols, dapps, and NFT projects all generate revenue. Like stocks, certain cryptos have better business models; some generate more money than others. 

Take the Ethereum blockchain for example: the world’s second-largest chain by market capitalization has generated an astonishing $851 million in revenue – $545 million of that went to miners, which are people who offer up compute power to help keep the chain moving. 

Using the little bit of context you learned above, you can discover that Ethereum has a P/E ratio of about 36 right now. 

The selloff in crypto – much like the months-long selloff in stocks – is tantamount to a “cool off.” All markets got hot during the pandemic and they’re now cooling off. It’s not just a great time to identify real valuable products, protocols, and chains – but it will be a time of cleansing.

That’s greatly epitomized in the failure of Terra. It was washed away because it couldn’t stand up to the scrutiny of the market; it got too big, too quick, and failed. It wasn’t doomed to fail, and investors might not have even known how dangerous it was as an investment until it was too late; but its failure will be a learning for developers, investors, and power users.

They will be wiser, and hopefully more cognizant, of its failings – so that we do not fail in the same way again.

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