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Comment by blowski | Hacker News Reader

Why has the crypto boom and bust lined up so closely with the COVID pandemic? Is it a coincidence or is there some underlying cause?

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Central bank action. The federal reserve drastically cut rates at the start of the pandemic, so a lot of people were stuck at home with cheap money.

Now, inflation is spiking, so the federal reserve raised rates and money isn't as cheap as it used to be, therefore people are pulling out of the market.

https://tradingeconomics.com/united-states/interest-rate

Add the helicopter money they gave people in many countries, that was also put straight into risky stocks or cryptocurrencies by many people. The monetary policy massively inflated asset prices and now the rug is being pulled under the retail investor's feet. Crypto is only the most obvious because the volatility is so extreme but the same happened in stocks. Almost like it was done intentionally. But who would benefit from such blatant market manipulation?

https://www.bloomberg.com/news/articles/2021-12-07/pandemic-...

Boom was about the money supply; bust is about rising interest rates to fight inflation.

COVID was the cause of the money supply, and now COVID is also the cause of ongoing supply shortages (in addition to money supply hangover), resulting in high inflation.

Of course: governments around the world flooded markets with stimulus cash and it all had to go somewhere. Now they are unwinding stimulus and it’s going away. Every reasonable observer has just been waiting for this to happen.

I thought crypto would collapse every year for the last 14 years, and I've been proven wrong every time. So I'm wondering why this time I'm right.

It does seem people struggle to learn from their mistakes. The last year has been marked by the institutionalisation of irrational exuberance.

Just look at that whole GME saga. A mob of people attempted to short squeeze a bunch of hedge funds, but got carried away and kept pumping up the price long after all the short sellers had closed out their positions.

GME is still riding at 24x the price prior to the short squeeze began (and about double its all-time-high prior to the Reddit intervention). Who are they squeezing now?

Crypto has had worse crashes in the last 14 years. What do you mean by you are right this time?

It has crashed many times but don’t forget; the last real recession was 2008; that’s 14 years ago; we have not had a financial crash since so we don’t know (well we do but the pundits say we don’t) how it will hold up. I think if ‘22 turns into a recession like I think it will, crypto might collapse; if not collapse, then at least fall further than believers would ever think. I would say btc will be a few k or less if a recession happens.

The question is: can you double the pool of people that pay in (the base of the pyramid) one more time? And for the longest time you could, but the end of the line might be reached soon. (Think about how much marketing crypto firms are throwing at people - the stadiums, commercials, ...)

My theory. There was substantial DeFI loans being taken out to invest in Luna/UST. When UST de-pegged, you had these DeFI loans get margin called putting further pressure. This then caused a bank run with significant sell pressure. This caused roughly 40Billion of assets lost. Some exchanges and DeFI lending platforms had user funds either through loans or by the exchange itself invested into UST/Luna and suffered losses. This caused a broader bank-run to many interest baring platforms out of fear. Celcius just recently had a bank-run leading to a liquidity crises and pausing withdrawals. Celcius started selling it's assets to cover withdrawal pressure, further pushing the price down. Binance paused withdrawls for a bit further causing fear and continuing the bank run, leading to sell pressure.

Personally, there's many Crytpo platforms which do not have enough funds to cover user deposits. As the bank run continues fraud will be exposed and continue driving more sell pressure, in a positive feedback loop. By the end of this large players who survive will come out much stronger.

Because this time the Federal Reserve is raising interest rates and reducing the money supply, which has never happened before since Bitcoin was invented. Low interest rates/quantitative easing/increased money supply (all same thing) is what fuels asset bubbles, including crypto. Take it away and the asset bubble deflates.

The war is probably also a big cause of the crash...

When covid started sporting events were cancelled and the general population received cash stimulus and with the ease of use of iPhone apps a lot of people that were used to gambling on sporting events switched to crypto. This led to an increase price which then attracted the second set of people and so forth.

People needed a hobby, I think. Now they're outside again.

Also, an outlet for gambling urges while a lot of sports events were cancelled. Now, they're betting on sports again.

Matt Levine's theory (regarding Robinhood mostly, but maybe applicable) is that people were bored (no sports to watch, can't go out, no cinema, no pubs), and so they started gambling on the markets. Additionally, many people reduced their spending (can't go out, no cinema, no pubs), and many of them retained their income or even augmented it (stimulus checks).

So, discretionary income and fewer choices on what to spend it?

It's a wealth transfer.

Apart from the good economical explanations other replies have brought up, there's also a link between crypto and Covid-19 via the rise of conspiracy theories.

Crypto is associated with some types of conspiratorial thinking: goldbug libertarians, ramblings about globalist bankers and George Soros, etc. The pandemic gave a boost to conspiracy theories overall, and crypto was a beneficiary.

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