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Crypto winter: Investment lessons from $2tn crash

Prague, Czech Republic - June, 2019: Silver Bitcoin, bit coin online digital currency frozen in the blue ice. Concept of block chain, crypto market crash. Frozen crypto money, depreciation
The collapse of the terra/Luna stablecoin seeded doubt over how adequately other stablecoins were backed by reserve assets and the beginning of a 'crypto-winter' descended upon the cryptocurrency market. Photo: Getty (Ja'Crispy via Getty Images)

Bank of England deputy governor Jon Cunliffe has listed the harsh lessons to be learned after the recent plunge into "crypto winter".

The valuation of the cryptocurrency market has dropped to less than $1tn (£844.4bn) from its November 2021 peak of $3tn

The drama began with the collapse of the terra/Luna algorithmic stablecoin in May when the price of the then $18bn algorithmic stablecoin terraUSD (UST-USD), which was supposed to have parity with the dollar, started to wobble.

Read more: Live crypto prices

The collapse of terra/Luna seeded doubt over how adequately other stablecoins were backed by reserve assets and the beginning of a "crypto winter" descended upon the cryptocurrency market.


Panic selling caused a flood of redemptions of stablecoins such as tether (USDT-USD) and USDC (USDC-USD), as spooked investors tried to "off-ramp" their value as prices plummeted.

Britain's Deputy Governor of the Bank of England Jon Cunliffe speaks during the Bank of England's financial stability report at the Bank of England in the City of London, Britain June 27, 2017.  REUTERS/ Jonathan Brady/Pool
Britain's deputy governor of the Bank of England Jon Cunliffe has warned of bitcoin's 'lack of intrinsic value'. Photo: Jonathan Brady/Pool/Reuters (POOL New / reuters)

The subsequent bankruptcy of crypto-brokerage Voyager Digital and crypto-hedge fund Three Arrows Capital has led to a number of high-profile firm failures.

The Celsius Network (CEL-USD) and Babel Finance have frozen withdrawals for their customers.

Bitcoin, the world's biggest cryptocurrency, has lost 70% of its value since November.

On Tuesday the deputy governor of the Bank of England (BoE) Sir Jon Cunliffe waded into the chilling waters of the crypto-ecosystem with a list of lessons for investors hoping to come out of the 'crypto winter' with something to show for their endeavours.

Speaking at the British High Commission in Singapore, Cunliffe said: "The collapse of terra put a spotlight on the adequacy of the backing of other stablecoins, particularly the adequacy of the real economy reserve assets backing the largest stablecoin, tether, which suffered significant outflows and, on several crypto exchanges, broke its peg to the dollar meaning many coinholders were not able to redeem at par."

Watch: The Crypto Mile: Episode 1 The power and potential of cryptocurrencies

In the last year, three-quarters of all trades on crypto-asset trading platforms involved a stablecoin.

However, Cunliffe warned that "in recent months we have seen two of the three largest stablecoins break away from their dollar pegs".

The BoE deputy then listed four lessons that investors and regulators can learn from the recent drama.

1. Technology does not change the underlying risks in economics and finance;

2. Regulators should continue and accelerate their work to put in place effective regulation of the use of crypto technologies in finance. Crypto-activities should not be allowed to proceed where we cannot apply regulation.

3. Regulators should stick to the iron principle of "same risk, same regulatory outcome". The BoE intends to apply this approach in the UK.

4. Crypto–technologies offer the prospect of substantive innovation and improvement in finance. But to be successful and sustainable innovation has to happen within a framework in which risks are managed. Innovation and regulation should be friends, not enemies.

Cunliffe then went on to warn of bitcoin's "lack of intrinsic value".

He said that crypto-assets have "no real economy assets backing them" and as they have "no means of generating revenue are only worth what the next buyer will pay, so they are therefore inherently volatile, very vulnerable to sentiment and prone to collapse".

Cunliffe dismissed the concept of bitcoin as "digital gold" and deemed it "a very speculative, risky asset".

He pointed to the fact that since November gold has lost 7% of its value, the S&P 500 (^GSPC) has lost 18%, while bitcoin has lost 70%.

Read more: The Crypto Mile: A journey into the metaverse that promises 'eternal life'

Cunliffe stressed the need to "bring the use of crypto technologies in finance within the regulatory perimeter" and said the world of institutional finance should move on and see this crash as the final death nail in the crypto coffin.

He stated that institutions should not think that "crypto is somehow ‘over’ and we do not need to be concerned about it anymore".

He warned that the rapid speed of growth of the crypto-ecosystem and the growing connections with conventional finance meant that it could become a systematic risk to world finance in the future.

Cunliffe stressed the need to nurture innovations made in the crypto-sector "without giving rise to increasing and potentially systemic risks".

For those seeking to enter the crypto fray now that prices look to be reaching a floor, Cunliffe had a cautionary message.

He said: "Financial assets with no intrinsic value, that is to say with no real economy assets backing them and no means of generating revenue, are only worth what the next buyer will pay.

"They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse. The proponents of crypto assets like bitcoin have argued that their technological design enables them to function as a hedge against economic volatility and inflation — a sort of ‘digital gold’.

"The reality, however, is that they behave as a very speculative, risky asset."

Read more: Bitcoin heading for a $10k fall, poll suggests

He went on to warn of the high leveraged positions that have greatly amplified the losses in the current crash and instigated a "fire sale of digital assets".

Speaking of the inherent risk that comes with leverage, he said: "We have seen a range of crypto funds taken down by these effects; one of the biggest has been here in Singapore with Three Arrows Capital filing for bankruptcy last week."

Three Arrows Capital (3AC) owe hundreds of millions to a variety of crypto platforms, such as $270m to, and approximately $650m to failed crypto-brokerage Voyager Digital.

Creditors of 3AC have asked a US bankruptcy court in Manhattan to force the cryptocurrency hedge fund's founders to participate in the liquidation proceedings, but the Three Arrows capital founders, Credit Suisse traders Zhu Su and Kyle Davies, have since disappeared.

Cunliffe ended his speech by projecting that the innovations that have emerged within the crypto-ecosystem will become proposed and developed in the non-crypto-world, such as tokenisation of assets and the promises of distributed ledger technology.

Watch: Steve Hanke: What is the value of bitcoin?