This time it is different – the crypto crash is real

Perhaps more significantly, the scale of the plunge is unlike anything seen before – more than $US2 trillion ($2.9 trillion) has been erased in just a few months and this time it isn’t just confined to individual investors or Bitcoin itself.

Tokens, coins, trading platforms, exchanges, lenders and companies set up to invest in crypto have all been dragged into the sell-off, compounding the ripple effect. The threat of contagion is growing.

The expansion of the crypto market has relied on pulling in an ever greater number of investors. It started with a clique of fanatical early adopters, sucked in growing numbers of armchair traders and some big institutions. Last aboard the bandwagon came a flurry of desperate celebrities, many with shameless abandon and little-to-no knowledge or understanding of the products they are endorsing.

Losses are therefore not just greater but more widespread this time around, and many investors, including some sizable Wall Street names, will struggle to bounce back.

It makes it hard to see how enough people can be persuaded to power another rally. The sheer quantum of those that get burnt may be too great.

What’s more, the growing use of leverage in the market means there is a huge liquidity mismatch, which is greatly amplifying this round of losses. This has exposed the fatal frailties at the heart of the crypto infrastructure that increasingly underpins the entire system these days. Interdependence is a problem too with some trading platforms often having assets and deposits tied up in other corners of the crypto world.

With the cost of living crisis raging, few ordinary investors will have the luxury of hanging around for a revival that may not materialise.

Goldman Sachs has warned this incestuousness poses a growing systemic risk. And unlike in mainstream finance there is no regulator waiting on the sidelines with a bailout like there was during the banking crash, which means the risk of investor flight is much greater.

There will of course be those still sitting on a decent profit, but largely they will either be institutional investors or those who got in early. Anyone that was relatively late to the party will be nursing huge losses.

One industry executive has talked of a two-year “crypto winter”. There will be those that have amassed enough wealth to bounce back. Indeed, Do Kwon, the South Korean entrepreneur whose $US40 billion Luna empire evaporated last month, has already found the immense audacity to attempt a comeback despite the threat of legal action from those who backed his last venture.

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But with the cost of living crisis raging, few ordinary investors will have the luxury of hanging around for a revival that may not materialise.

As ever with any speculative bubble, the big winners will be the hedge funds that have placed massive bets on crypto’s collapse. The hope is that, with time, regulators catch up and eventually bring some stability to proceedings. For now, investors are on their own.

Telegraph, London