What to know as crypto such as Bitcoin and stablecoins plunge Bitcoin and other cryptocurrencies are being caught up in the storm impacting all kinds of markets, including stocks. The plunge in a type of crypto called TerraUSD is raising special concern.

4 things to know as cryptocurrencies such as Bitcoin (and stablecoins) melt down

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SCOTT SIMON, HOST:

Bitcoin and other cryptocurrencies surged in value during the pandemic and turned many amateur investors into millionaires, at least on paper. But today, crypto is crashing, and Bitcoin is trading at less than half of what it was at its all-time high back in November. NPR's David Gura joins us now. David, thanks so much for being with us.

DAVID GURA, BYLINE: Good to be with you.

SIMON: And why are cryptocurrencies being hit so hard?

GURA: Well, they've gotten caught up in this broader market selloff we've seen. Investors are shying away from speculative assets at a time when interest rates are going up, inflation is at a 40-year high, and there's fear on Wall Street we could be headed for a recession. This is proving very unsettling, especially to first-time investors who bought into Bitcoin recently. Remember; it wasn't too long ago people thought cryptocurrencies were going mainstream. Just back in February, actors like Matt Damon and Larry David were promoting crypto companies in Super Bowl ads.

SIMON: The Larry David ads are very funny. Let's talk about Bitcoin. It was supposed to be a hedge against inflation, right?

GURA: Yeah, so Bitcoin is the oldest and the most popular cryptocurrency, and proponents have long touted it as a safe place to be when prices are rising. That was the promise, but it has not been the reality, at least so far. We're seeing a tight correlation between the performance of tech stocks and cryptocurrencies. Now, if Bitcoin was a real hedge against inflation, it should be going up while tech stocks are going down. Randy Frederick covers cryptocurrencies for Charles Schwab.

RANDY FREDERICK: A lot of people thought that it would be an inflation hedge, but there's really very little data to prove that. And, in fact, not just recently, but over the long haul, that hasn't been the case.

GURA: Now, Frederick is not willing to rule out Bitcoin could be an inflation hedge someday. He stresses that even though Bitcoin is the oldest cryptocurrency on the block, it's only been around for a little over a decade, so analysts don't have a lot of historical data to work with, and he'd like to see how it holds up during more market cycles.

SIMON: And what about these cryptocurrencies - I'm hearing a little more about them now - called stablecoins?

GURA: Yeah. Cryptocurrencies have spawned offshoots that are more sophisticated, potentially more dangerous, according to regulators, and stablecoins are one example. The idea behind many of them is they're backed by real assets like the dollar or a government bond. That's supposed to make them safer because when you want to get rid of them, the seller should have money on hand to cash you out. But there are other stablecoins that are not backed by real assets, and one of them that's made headlines recently is called TerraUSD. Instead of being pegged to the dollar or a government bond, it's pegged to other assets, including other cryptocurrencies, which makes it much riskier. And as we saw this week, despite it being called a stablecoin, it's not stable at all. The value of TerraUSD has cratered to a small fraction of what it was.

Pat Tschosik is a senior portfolio strategist with Ned Davis Research. And while he acknowledges this was unsettling, he predicts there will be a winnowing of the crypto space.

PAT TSCHOSIK: This is still a developing area. You know, there's going to be speculation. There's going to be booms and busts along the way. And this is all still new.

GURA: Stablecoins have come under scrutiny from regulators. And with what's happened, that's likely to intensify.

SIMON: So what happens next? Where do we go from here? - all of those obvious questions.

GURA: Well, analysts expect it's likely the outlook for crypto will continue to be tied to broader market sentiment, but that TerraUSD crash is likely to alarm policymakers. Treasury Secretary Janet Yellen has warned of the dangers of Stablecoins, and S.E.C. chair Gary Gensler has called crypto in general the Wild West. And both of them have signaled more crypto regulation is on the way. And the regulations are coming as there are signs that cryptocurrencies are becoming more popular. A few weeks ago, Fidelity, the largest provider of retirement plans, announced it plans to let employers offer Bitcoin in their 401K's. Tschosik calls that a major milestone. He says he's still bullish on Bitcoin despite the selloff and the threat of more regulation. And a big reason for that, Scott, he says, is how much room it still has to grow and how popular it continues to be with young people in particular.

SIMON: NPR's David Gura, thanks so much.

GURA: Thanks, Scott.

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