If you had invested £ 100 ($ 122) in the cryptocurrency Luna a month ago, you could be quietly confident that you made a reasonable bet. But since then the value of the Moon has fallen sharply – at the time of writing, these 100 pounds are worth about 4 pence (5 cents).

Luna was far from the only victim of the week when cryptocurrencies fell 30%. Some have recovered to some extent, but this still represents a total seven-day loss of more than $ 500 million (£ 410 million), raising existential questions about the future of the market.

Perhaps the failure was caused by a financial “attack” on the Terra Stablecoin (UST), which should correspond to the US dollar, but is currently trading for just 18 cents. His partner coin, Luna, subsequently collapsed.

An to attack This kind of is extremely complex and involves placing multiple transactions in the crypto market in an attempt to cause certain effects – which can provide the “attacker” a significant gain.

In this case, these deals led to the fall of Terra, which in turn led to the fall of the coin of her partner Luna. As soon as this was noticed, it caused panic, which in turn caused withdrawals, which caused further panic. Some (but not all) stablecoins are heavily dependent on perception and confidence – and once that’s shaken, big drops can take effect.

Importantly, the recent severe drop in cryptocurrencies has called into question how stable stablecoins really are. After all, they are designed to have virtually zero volatility while maintaining “binding” to some other underlying asset.

However, the effects observed this week spread to the entire cryptospace, creating losses in one day, similar – or perhaps worse than – “black environment” for the crypt (Black Wednesday was the day in 1992, when speculators achieved collapse in the value of the pound). Even leading stablecoin Tether has lost its peg to 95 cents a dollar, possibly demonstrating the need for regulation. After all, if stablecoins are unstable, then where is the safe place for the crypt?

Crypto-confidence

How investors will react will be key to the future of cryptocurrencies. We have already seen panic and despair, some have compared this crash to a traditional run along the shores. But when it comes to bank launches, customers tend to worry that their bank won’t be able to give them money, rather than worrying that their money has become worthless.

A clearer comparison is with stock market crashes, when investors worry that stocks and the shares they hold may soon turn out to be insignificant. And so far the reaction to this crypto crash suggests that most crypto holders view their investments in a similar way.

Despite the historical volatility of prices, the behavior of investors is often the main assumption: the price of assets will rise and will continue. In this scenario, the investor does not want to miss. They see assets growing, consider it “reliable,” and then invest.

Often encouraged by initial successes, an investor can invest more. Combined this is with social media and the fear of losing “inevitable” profits, and investment continues.

Simply put, many have invested in cryptocurrencies because they believed it would make them richer. This belief has undoubtedly faltered.

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But another motivation for investing in cryptocurrencies may be the belief in their transformational nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchange.

For these investors, any increase in the value of cryptocurrency is a demonstration of the growing power of cryptocurrency over traditional money. But also a significant reduction in the value of the crypt – it’s not just a loss of money – it’s an ideological loss.

At the same time, however, such an ideological position makes a group of investors much less likely to sell in a sharp fall. And it is this group that can still give hope to the sector.

In the face of stock market crashes, we are talking about a return to “fundamental value”. The fundamental value of a crypt is often considered to be zero. However, there may be at least some fundamental value that is based on faith. The size of the pool of investors who own cryptocurrency because they believe in its long-term future and the promise of new money can determine the fundamental value of cryptocurrency.

Indeed, when we view cryptocurrency investors as different groups with different motivations, we can better understand the behaviors we observe. Investors may be reassured that we may have seen the worst of this crash and that better times may lie ahead. But, as any financial advisor will tell you, on the crypt, as in any other market, nothing is guaranteed.

Gavin Brown, Associate Professor of Financial Technology, University of Liverpool; Richard Whittle, Research Fellow, CAPE, UCL, and Stuart Mills, Member of the Behavioral Sciences, London School of Economics and Political Science

This article is republished with The Conversation under a Creative Commons license. Read the original article.

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