The crypto selloff, explained
After a historically calm summer for crypto, volatility returned to markets last Thursday prompting a selloff. [Jakie Niam via Getty Images]
There’s never a dull moment on the blockchain. Here’s what you need to know this week:
Crypto markets endured a summer selloff. A closer look at what prompted last week’s flash crash.
4 tips for navigating crypto down cycles. How to keep your composure when crypto prices fall.
This week in numbers. The seven-figure sum an NFT artist made after his debut collection sold out in just two hours, and other key stats to know.
CRASH COURSE
Why crypto markets fell last week after a historically stable summer
For almost the entire summer, crypto markets were uncharacteristically sleepy — with bitcoin’s volatility (a measure of how much it swings up and down) hitting a six-year low in July. That all changed on Thursday, when crypto markets saw their sharpest downturn since November — with nearly 12% of BTC’s market cap erased in a single night. While markets have recovered somewhat, prices for a wide range of cryptocurrencies remain significantly lower than they were a week ago.
Here’s what you need to know about the selloff.
Why did BTC decline so sharply?
The largest cryptocurrency by market cap first began dipping early Thursday, after Federal Reserve officials said they may need to hike interest rates further, as part of ongoing efforts to tame inflation — which has included 11 hikes since March 2022.
Later that afternoon, the troubled Chinese property-development giant Evergrande filed for Chapter 15 bankruptcy in New York, sparking fears that failures in the Chinese real-estate sector could spill into other markets.
As BTC continued to sink, it triggered a chain reaction among big-money holders of leveraged crypto derivatives. Or as Forbes put it, “as crypto prices fall, options expire unprofitably and futures get liquidated, thereby intensifying the downward pressure on prices.” More than $1 billion in crypto futures and options contracts were ultimately liquidated.
Altcoins including DOGE and SHIB also saw steep declines.
As turbulent as the week was for BTC, smaller tokens as a group took a bigger hit. XRP, Dogecoin, Polygon, Solana, and Avalanche all saw declines of between 10 and 20 percent on the week.
XRP, which had been boosted by rising institutional investor interest due to positive developments in its legal battle with the SEC, fell from $0.59 on Thursday morning to $0.49 that night.
Shiba Inu, which ended the week down around 23%, was impacted both by broader market forces and unique problems of its own. The rocky rollout of its much-hyped Shibarium network last week trapped at least $1.7 million of users’ ETH on the new blockchain for more than five hours.
Promising news about ETH futures ETFs helped the second-largest cryptocurrency bounce back.
Ethereum prices, which had been hovering above $1,800, dropped around 8% during Thursday’s selloff, but clawed part of the way back that evening after Bloomberg reported that the SEC is likely to approve a number of applications for exchange-traded funds (ETFs) holding ETH futures contracts by October. Nearly a dozen firms have applied, including Volatility Shares, Bitwise, Roundhill, and ProShares. (The SEC has not yet commented on the matter.)
ETH futures ETFs are an indirect way for investors to gain exposure to the cryptocurrency via conventional brokerages. Instead of buying ETH directly, the ETFs would buy ETH futures contracts – essentially bundles of agreements to buy ETH in the future at a specific price.
Similar BTC futures ETFs launched in 2021, and many market watchers hope that the anticipated ETH futures ETF approvals will pave the way for more kinds of crypto ETFs in the near future. As you might remember, crypto’s latest rally in June was sparked in part by news that Wall Street giants including BlackRock were pursuing “spot” BTC ETFs, which would buy actual bitcoin — as opposed to bitcoin futures — and sell shares to customers.
By Friday morning, ETH had climbed to nearly $1,700, and outperformed BTC by about 2% during the market slide.
The bottom line…
It’s still unclear if last week’s market selloff was a short-term blip, or a sign that crypto-market volatility is returning as we roll into autumn. But if you take a longer view, the biggest cryptocurrency remains remarkably stable by historic standards — with many market watchers noting that BTC’s declining volatility has boosted its evolution into a widely popular “store of value” asset class. Or as Bloomberg analyst Mike McGlone tweeted, “Gold will always have a place in jewelry and coin collections, but most indicators point to an accelerating pace of Bitcoin replacing the metal as a store of value in investor portfolios.”
KEEP YOUR COOL
How to stay calm in a down market
Even though crypto is famously volatile, sudden changes in price can be harrowing — especially if it’s your first time experiencing a significant selloff. But as veteran traders will tell you, it’s a lot easier to stay calm and make smart moves if you have a plan. Here are some helpful tips to keep in mind:
Keep your emotions out of it. Emotional trading can lead to badly-timed trades, like selling when prices are lowest or buying at a peak due to FOMO.
Think ahead. Consider your long-term goals. Did you buy with the intention of selling many years in the future? If so, it’s probably ok to stop refreshing that tab and take a deep breath.
Look into dollar-cost averaging. Dollar-cost averaging is a popular strategy for reducing the sting of volatility. It involves buying a smaller amount of crypto at regular intervals — like every week or month — no matter what the market is doing.
Trade within your limits. Are you planning to “buy the dip?” Remember: No matter how confident you are about a particular asset, you should never put in more than you can afford to lose.
NUMBERS TO KNOW
$1 million
Total sales of Beijing-based artist Yue Minjun’s first-ever generative NFT project, which sold out in two hours. The collection, called Boundless, features 999 variations of Minjun’s, hyper-stylized laughing man self-portraits. ”Most people in my world thought it a little crazy to go into the NFT space now,” Minjun said. “The market is nowhere near what it was — for me, that’s an opportunity.”
767,000
Tuesday’s average daily transaction volume on Base, the new Ethereum layer-2 network incubated by Coinbase. On August 15, Base’s average transaction count briefly outpaced those of longtime layer-2 networks Optimism and Arbitrum for the first time.
$160,000
Approximate dollar value of the 6.25 BTC block reward that an individual bitcoin miner claimed on Friday after solving block 803,821. The lucky miner was using modest equipment that one software engineer noted “would only solve a block solo on average once every 7 years.” In Bitcoin’s early years, anyone with a decently powerful PC could feasibly participate in mining; these days the industry is powered by vast mining farms full of specialized equipment.
6
Number of additional blockchains that will support USDC, beginning in September. According to a Coinbase blog post, the stablecoin will be compatible with 15 blockchains in total “to better serve a growing number of businesses, applications, and developer communities.”
TOKEN TRIVIA
What is the Lightning Network?
A
A symphonic rock group from the 1970s
B
A layer 2 technology that’s making bitcoin payments faster and cheaper
C
A digital wallet for sending and receiving money internationally
D
A global, decentralized network of computers
Find the answer below.
Trivia Answer
B
A layer 2 technology that’s making bitcoin payments faster and cheaper
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