As crypto prices crash, the lawless market could be in for a regulatory reckoning

It could be contagious… Crypto markets have caught a cold — or worse. The crypto industry has lost nearly $500B this week after two top stablecoins were “unpegged” — and caused investors to panic-sell other coins. Refresher: stablecoins are cryptos whose value is (theoretically) pegged to other assets, like the USD. A recap:

• First, stablecoin TerraUSD (UST) fell to a third of its “fixed” value after its algorithm failed to rebalance its price (it’s still down).
• Then the largest stablecoin, Tether, slipped from its $1 peg, falling to $0.95 before recovering. (Tether is backed by cash, not just an algorithm.) Skittish investors have been selling off the bigger coins this week too: bitcoin’s down 22%, ether 31%, and solana 49%.

This could be a (decentralized) bubble… When an entire asset class (think: real estate, stocks) is overvalued, it’s often called a “bubble” — and if prices later crash, the bubble bursts. Some experts say crypto’s sell-off is starting to resemble the dot-com bubble that led to the 2000 tech crash, or the housing bubble that led to the Great Recession (2007-09). In both cases, a sharp panic-fueled sell-off followed years of soaring speculative prices. (Worth noting: both those crashes wiped out trillions in wealth, much more than the crypto sell-off has.)

THE TAKEAWAY

Bursting bubbles are destructive… but they can be beneficial. If a crypto bubble pops, coins could disappear, companies could go bankrupt, and investors could lose billions. Yet more consumer protections, stronger regulations, and leaner companies could also emerge (Google and Amazon vaulted to global dominance after dot-com-era consolidation). That was what crypto-supporting Sen. Pat Toomey meant this week when he said that “failure should be an option” in the crypto space.