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Crypto crisis: how digital currencies went from boom to collapse


Yuri Popovich had watched his neighbours’ houses burn down to the ground in Kyiv and he needed a safe place to put his money. So he did what millions of amateur investors have done in recent years: he turned to cryptocurrency.

“It was impossible and unsafe to store funds in the form of banknotes. There was a big risk of theft, we also had cases of looting. Therefore, I trusted a ‘stable and reliable’ cryptocurrency. Not for the purpose of speculating, but simply to save,” he says.

The digital asset that Popovich chose in April was terra, a “stablecoin” whose value was supposed to be pegged to the dollar.

It collapsed in May, sparking a rout in the cryptocurrency market whose victims include Popovich. He lost $10,000 (£8,200).

What is a cryptocurrency?

A cryptocurrency is a decentralised digital asset built on top of a blockchain. The first, and still the largest, cryptocurrency, is bitcoin, and its blockchain is secured by miners using a proof-of-work system. But other cryptocurrencies exist too. Ethereum is the second biggest, and is used as a platform for building other decentralised projects, such as stablecoinsNFTs and shitcoins.

What is a blockchain?

A blockchain is the decentralised ledger that tracks the ownership of a cryptocurrency or other digital asset. New transactions are added on to the end of the blockchain, and using cryptography contain a record of every previous transaction. There is no one “official” blockchain, but the network as a whole is kept consistent through a consensus algorithm like proof of work.

What is proof of work?

Proof of work is the consensus algorithm used to secure bitcoin, ethereum and many other large cryptocurrencies. It asks “miners”, who run the computer nodes that make up the physical infrastructure of the blockchain network, to effectively burn electricity to generate digital raffle tickets. Every 10 minutes, one of those raffle tickets wins the prize – a reward of cryptocurrency, and the right to verify the next block on the blockchain. The system means that it is very expensive to attack a cryptocurrency head-on: you need to spend more electricity than every other miner put together.

What is a miner?

A miner is the person running a cryptocurrency node. They use specialised computers, called mining rigs, to perform a specific mathematical function called “hashing”. The network treats the results of these hashes as lottery tickets, and every 10 minutes one miner is declared the winner. For bitcoin miners, that prize is currently $125,000, which incentivises the bitcoin network as a whole to consumer around 130TWh a year, around the electricity usage of Argentina.

What is ethereum?

The most important successor to bitcoin, ethereum is described by its backers as a “world computer”: as well as simple transactions, users can create “smart contracts”, small programs that operate on the network. Those smart contracts can be chained together to create whole “decentralised apps”, which operate without any individual computer being in charge of them, and they can also be used to create new cryptocurrencies and digital assets that live on the ethereum blockchain, rather than needing more miners and a new network.

What is a stablecoin?

A stablecoin, such as tether, USDC, or UST, is a particular type of cryptocurrency intended to have a fixed value. They occupy an important role in the crypto economy, since they let people “cash out” of risky bets without going through the hassle of converting money back to conventional cash. But keeping the value stable is hard: it requires a large centralised organisation to operate like a bank, keeping a lot of reserves on hand and spending them to stabilise the currency. “Algorithmic” stablecoins, such as UST, also known as terra, have been attempted, but have an unfortunate tendency to enter a “death spiral”, where a crashing value leads to more tokens being created, pushing the value lower.

What is an NFT?

An NFT, or non-fungible token, is a type of digital asset that can be traded like a cryptocurrency, but isn’t “fungible” like money: one NFT is distinct from another. Early NFTs resembled collectibles, like digital football stickers, or were used to trade artworks, but the lack of any functional utility led to a boom and bust of the sector in 2021. The latest generation of NFTs try to focus on “utility”, offering membership benefits or technological advantages to holders.Body

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What is a cryptocurrency?

A cryptocurrency is a decentralised digital asset built on top of a blockchain. The first, and still the largest, cryptocurrency, is bitcoin, and its blockchain is secured by miners using a proof-of-work system. But other cryptocurrencies exist too. Ethereum is the second biggest, and is used as a platform for building other decentralised projects, such as stablecoinsNFTs and shitcoins.

What is a blockchain?

A blockchain is the decentralised ledger that tracks the ownership of a cryptocurrency or other digital asset. New transactions are added on to the end of the blockchain, and using cryptography contain a record of every previous transaction. There is no one “official” blockchain, but the network as a whole is kept consistent through a consensus algorithm like proof of work.

What is proof of work?

Proof of work is the consensus algorithm used to secure bitcoin, ethereum and many other large cryptocurrencies. It asks “miners”, who run the computer nodes that make up the physical infrastructure of the blockchain network, to effectively burn electricity to generate digital raffle tickets. Every 10 minutes, one of those raffle tickets wins the prize – a reward of cryptocurrency, and the right to verify the next block on the blockchain. The system means that it is very expensive to attack a cryptocurrency head-on: you need to spend more electricity than every other miner put together.

What is a miner?

A miner is the person running a cryptocurrency node. They use specialised computers, called mining rigs, to perform a specific mathematical function called “hashing”. The network treats the results of these hashes as lottery tickets, and every 10 minutes one miner is declared the winner. For bitcoin miners, that prize is currently $125,000, which incentivises the bitcoin network as a whole to consumer around 130TWh a year, around the electricity usage of Argentina.

What is ethereum?

The most important successor to bitcoin, ethereum is described by its backers as a “world computer”: as well as simple transactions, users can create “smart contracts”, small programs that operate on the network. Those smart contracts can be chained together to create whole “decentralised apps”, which operate without any individual computer being in charge of them, and they can also be used to create new cryptocurrencies and digital assets that live on the ethereum blockchain, rather than needing more miners and a new network.

What is a stablecoin?

A stablecoin, such as tether, USDC, or UST, is a particular type of cryptocurrency intended to have a fixed value. They occupy an important role in the crypto economy, since they let people “cash out” of risky bets without going through the hassle of converting money back to conventional cash. But keeping the value stable is hard: it requires a large centralised organisation to operate like a bank, keeping a lot of reserves on hand and spending them to stabilise the currency. “Algorithmic” stablecoins, such as UST, also known as terra, have been attempted, but have an unfortunate tendency to enter a “death spiral”, where a crashing value leads to more tokens being created, pushing the value lower.

What is an NFT?

An NFT, or non-fungible token, is a type of digital asset that can be traded like a cryptocurrency, but isn’t “fungible” like money: one NFT is distinct from another. Early NFTs resembled collectibles, like digital football stickers, or were used to trade artworks, but the lack of any functional utility led to a boom and bust of the sector in 2021. The latest generation of NFTs try to focus on “utility”, offering membership benefits or technological advantages to holders.Body

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Popovich says his losses were “devastating”, although donations from sympathetic onlookers on social media have helped make up some of the shortfall. He says: “I stopped sleeping normally, lost 4kg, I often have headaches and anxiety.”

Popovich is one of many experiencing the deep chill of the current crypto winter, more than four years after the market’s cornerstone, bitcoin, marked the first digital freeze by tumbling from its then peak.

Cryptocurrencies value chart

It went on a long tear after that but it has come to a juddering halt, with bitcoin falling below the $20,000 mark at one point this month – far below its peak of nearly $69,000, which it hit last November.

The fall has been sharp and spectacular: an overall market that was estimated to be worth more than $3tn barely six months ago is now worth less than $1tn.

Crypto boom: a new digital economy

The beginnings of the latest crypto boom held all the hallmarks of being another instance of the “Robinhood economy”, named after the popular American stock trading app.

Bored white collar workers, stuck at home because of pandemic lockdowns but awash with disposable income, turned to day trading as a way to pass the time. Subscribers to the r/WallStreetBets forum on the popular online discussion site Reddit doubled over the course of 2020 and then quadrupled in the first month of 2021, as a small army of retail investors flooded into assets as varied as the then bankrupt car rental company Hertz, the troubled video game retailer GameStop and the electric car manufacturer Tesla, pushing the latter from $85 at the beginning of the pandemic to a high of $1,243 towards the end of 2021.

Cryptocurrencies also benefited from the surge in day trading. Bitcoin soared from a low of $5,000 in March 2020 to more than $60,000 a year later. The currency has had that sort of precipitous increase before: in 2017, it had risen 20-fold, to its then peak of $19,000. But in the latest boom, ethereum, the number two cryptocurrency, had an even more impressive climb, from just $120 to a high of almost $5,000 in 2021.

Bitcoin
Bitcoin trading has exploded in the past decade. Photograph: Sascha Steinbach/EPA

Cryptocurrency is the name for any digital asset that works like bitcoin, the original cryptocurrency, which was invented in 2009. There is a “decentralised ledger”, which records who owns what, built into a “blockchain”, which secures the whole network by ensuring transactions are irreversible once made. In the years since then, a dizzying amount of variations have arisen, but the core – the blockchain concept – is remarkably stable, in part because of the social implications of truly decentralised…



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