The head of one of New Zealand's cyptocurrency exchanges says it is preparing for "sustained crypto winter" after more than US$300 billion was wiped out by the crash in prices since Monday.
Bitcoin - the most well-known of the digital currencies - has plunged to its lowest point since 2020 while a coin called TerraUSD, which pitched itself as a stable means of exchange, collapsed - falling from US$1 to US1c on Thursday.
Janine Grainger, chief executive of Easy Crypto, said there had been a gradual downward trend in Bitcoin in the last three months which had accelerated to the point where it fell 20 per cent in the last week.
"It looks like we are going to be settling in for a longer and lower period - I can't predict what the markets are doing - but we are preparing for another crypto winter where the markets are just flatter and prices are lower for a longer period of time."
Grainger said different factors were behind the pressure on the market.
"There is what is happening in the broader global economy - we have got the Ukraine/Russia situation, volatility in Sri Lanka, interest and inflation news coming out of different central banks and different government policies that are impacting the broader economic conditions."
She also pointed to falls in the equity markets with the S&P and the Dow Jones both down.
"It is just with the crypto market it tends to do whatever the traditional financial markets are doing but a little bit more extreme. So when the markets are up crypto is up even more, when the markets are down crypto is down even further is typically how it seems to work."
It's not the first time cryptocurrencies have fallen sharply. In 2018 Bitcoin plummeted 80 per cent.
But this time, the falling prices have broader impact because more people and institutions hold the currencies. Critics said the collapse was long overdue, while some traders compared the alarm and fear to the start of the 2008 financial crisis.
On Thursday New Zealand-based cryptocurrency retailer BitPrime paused trading on its platform because it no longer had enough capital to facilitate transactions. BitPrime told customers in an email on Thursday afternoon that trading had been suspended due to "liquidity issues" and "extreme market volatility", businessDesk reported.
"This is like the perfect storm," said Dan Dolev, an analyst who covers crypto companies and financial technology at US company the Mizuho Group.
During the coronavirus pandemic, people have flooded into virtual currencies, with 16 per cent of Americans now owning some, up from 1 per cent in 2015, according to a Pew Research Centre survey. Big banks like Northern Trust and Bank of America also streamed in, along with hedge funds, some using debt to further juice their crypto bets.
In New Zealand a survey by the Financial Services Council found the percentage of Kiwis with cryptocurrency investments rose from 3 per cent in March 2020 to 9.5 per cent in April 2021.
And one in five (21 per cent) were either currently invested or had previously invested in cryptocurrencies - an increase of around 7 per cent since March 2020.
Two KiwiSaver providers have also jumped on board. NZ Funds Management added the ability to invest in cryptocurrency to its KiwiSaver funds in October 2020 and last week Koura Wealth launch a new carbon-neutral cryptocurrency fund.
Rupert Carlyon, Koura chief executive, said the new fund had only begun investing as of last night [Friday night].
"So from our perspective we are not entirely unhappy. Launching a new fund, you would always rather launch at the bottom or in the middle of a downturn than at the peak."
He said it was better to be buying Bitcoin at US$26,000 than to have bought it three weeks ago when it was US$36,000.
"But in saying that it could fall further. What we have seen over the past 10 years this is part and parcel of cryptocurrency investing. Bitcoin has had a number of significant falls - it is not the first time and I doubt it will be the last time. And that is why from our perspective when we are talking to our clients we are saying we expect it to drop by more than 50 per cent at least one in every two years.
"This is an investment for investors who can withstand very high levels of volatility and that are going to be willing and able to see through it. We really want to make sure we are getting the right people there."
Grainger said the fall had prompted a doubling in trading on the platform but only a slight increase in the volume of those selling.
"We have seen a little bit of an increase in the volume of sell price come through - but not massively significant change. I think a lot of people are seeing it as an opportunity - people have a long-term view.
"We are back at 2020 levels in terms of Bitcoin's price so for those that believe in the long term in the projects and the future of digital assets - it can be seen as a good opportunity to get in."
But Easy Crypto put a stop to trading in TerraUSD on Thursday after it slumped following other exchanges who made the same move.
"We are not selling TerraUSD anymore because of issues with that particular project."
She said it remained open for trading in the other 160 currencies it offered on the platform.
Tether, one of the world's best-known stable coins, also fell as low as US95c on Thursday - the first time it lost its peg to the US dollar.
Grainger said the fall appeared to be driven by high volumes of sellers.
"A lot of investors are liquidating their positions and stable coins are the way that people cash in and out of the crypto market. You lock in a position by trading into a stable coin to remove volatility and then people will quite likely be withdrawing into regular currency."
She said Tether had stated on Friday that they had done US$300m of redemptions in just 24 hours but that there was no issue on their side for redemptions.
Grainger said stable coins were a relatively new development in cryptocurrency and had developed in advance of regulations around it.
"This is probably a good wake-up call to regulators in terms of there needs to be a bit more oversight and a bit more visibility over supply of the stable coins to ensure that they are providing the guarantees that consumers would expect when they use them."
It has already come to the attention of regulators in the US and last year the US Treasury Department issues a report calling on Congress to devise rules for the stable coin ecosystem.
"We really need a regulatory framework," Treasury Secretary Janet Yellen said at a congressional hearing on Thursday. "In the last couple of days, we've had a real-life demonstration of the risks."
Stable coins "present the same kinds of risks that we have known for centuries in connection with bank runs", she added.
How long crypto's collapse might last is unclear. Cryptocurrency prices have typically rebounded from major losses, though in some cases it took several years to reach new heights.
"It's hard to say, 'Is this Lehman Brothers?'" said Charles Cascarilla, a founder of the blockchain company Paxos, referring to the financial services firm that went bankrupt at the start of the 2008 financial crisis.
"We're going to need some more time to figure it out. You can't respond at this type of speed."
- additional reporting New York Times