Bitcoin and the rest of cryptocurrencies have been in free fall for two months. Since the November highs, the most famous virtual currency has lost 44% of its value, Ethereum 49% and Dogecoin (promoted by Elon Musk) 56%. This crash is not only affecting digital assets, but is dragging down a myriad of listed companies whose core business is closely tied to this new world of crypto assets.
A good example is Coinbase, a virtual currency trading and custody platform, which debuted on the stock market on April 14, 2021. On its first day, the shares soared 20%, valuing the company as a whole at more than 100,000 million dollars. With digital assets crashing, investors have been fleeing the firm, which is now worth some $40 billion.
It is estimated that the total value of all these electronic currencies has fallen by 1.2 trillion dollars since November. The cause? In part, the Federal Reserve’s decision to start raising interest rates. When money is very cheap, investors have looked anywhere for opportunities to make a profit. But now that it is going to get more expensive, these alternative investments no longer seem so attractive.
The world of digital assets has also been affected by the announcements of China and Russia that they are going to ban transactions in these currencies.
Three legs of a booming sector
- Mined. To obtain cryptocurrencies you have to use dozens of computers that solve algorithms. Most of the miners are in China, but the country has banned this activity. In Canada and the United States, several listed companies specializing in renting this computer equipment to miners have sprung up.
- platforms. When you get a bitcoin you have to keep the access keys to the codes in a safe place. That is why platforms such as CoinBase have emerged that offer a custody service for digital assets and are also used to buy and sell them. They even offer debit cards referenced to cryptocurrencies, thanks to agreements with Visa or Mastercard.
- Advice. Another line of business in this sector are firms specialized in advising other companies on how they can take advantage of blockchain technology and the universe of digital assets. There is increasing interest in the financial and legal sectors about the opportunities it offers.
Another listed company that is collapsing dragged down by bitcoin is MicroStrategy. Although in theory it is a software company, its CEO, Michael J. Saylor, has made it very popular because he has bet heavily on bitcoin, reinvesting his profits in this cryptocurrency. During the last few months, it has spent 3,750 million dollars to continue buying this asset, with which it has completely linked its future to the price of this virtual money. The company has more than 5,000 million dollars in these digital assets and Saylor has assured that they are not going to sell them under any circumstances.
A fundamental part of this new sector of crypto assets has to do with how they are obtained. Bitcoin and other virtual currencies are made by deciphering a series of complex algorithms with computers. After several days of what is called in the jargon “mining”, the code is solved and a new coin is obtained.
To take advantage of this dynamic of intensive use of computer equipment in mining, companies have appeared that set up facilities with thousands of computers and then rent them to mining companies. One of these firms, the Canadian Hut 8, which is listed on the Nasdaq, has lost 65% of its value since the highs reached in November. The same has happened to the also Canadian Bitfarm, which has five large mining centers, and which has left more than half of its market capitalization. Or the American Riot Blockchain.
The technology used by digital assets is that of the block chains (blockchain, in English), which allows validating each of the mining or currency exchange operations in a decentralized manner. There is no need for a government or a clearinghouse to vouch for that transaction, rather it is the community as a whole that certifies it.
The defenders of blockchain They defend that it is a technology that can revolutionize many sectors, especially the financial and legal sectors. Companies like digital-galaxy advise to expand the use of technology, but have also suffered severe falls due to the collapse of the price of cryptocurrencies.