The pace of disruptions in "digital assets" has intensified over the past few weeks, as losses in cryptocurrencies have led some companies to the brink of bankruptcy. According to a report published by the "Wall Street Journal," the collapse of certain cryptocurrencies wiped out billions of dollars in May, prompting a British Virgin Islands court last week to liquidate a hedge fund. The newspaper noted that the risks associated with borrowing digital assets have increased, as some players in the cryptocurrency market establish financial links between each other. Chris Bendixen, head of research at London-based "CoinShares," told the Wall Street Journal: "Everything is deeply interconnected; we didn't have this in 2018," referring to the downturn in cryptocurrencies during previous times.
The report explained that although these cryptocurrencies are new, the problems they face are well-known in traditional finance. During the 2008 crisis, banking lending practices led to a liquidity shortage for banks, prompting regulators to tighten oversight. Digital asset prices reacted to the Federal Reserve's interest rate hikes, but the cryptocurrency crisis intensified in May after the Terra currency abandoned its peg to the dollar, resulting in the collapse of the Luna cryptocurrency, causing estimated losses of $40 billion.
Following the events surrounding Luna, the hedge fund Three Arrows Capital faced a liquidation order after previously issuing a notice declaring its default on a loan valued at 15,000 Bitcoin and $350 million. The issue with this hedge fund wasn't just its incurred losses; it also affected other companies. Cryptocurrencies remain largely unregulated, with a limited number of federal laws specifically addressing this industry, which reached a peak value of over $3 trillion last year. The newspaper confirms that the "problems in the cryptocurrency market" that have recently arisen are merely "a drop in the bucket," especially in light of the widespread sell-off in the market.
