Dear all, Upon inheriting the Looking Glass from our predecessors, we identified a number of key issues. Firstly, there were simply not enough articles being published, due both to a lack of submissions from the school community and limited responsiveness from the previous Academic Team. Secondly, the Looking Glass had not been advertised or explained effectively enough to the wider school community. As a result, we plan to implement a more consistent and engaging stream of articles on the Looking Glass. As part of this initiative, we are looking to recruit a select group of keen writers from across the lower school who would be willing to produce one high-quality piece of writing, discussion, or media each month for publication on the Looking Glass. We believe this will be hugely beneficial both to the school community, which will gain access to a wider range of opinions and viewpoints, and to prospective writers, who will be able to reference their experience contributing to the Look...
This essay came in second place in the inaugural Fuller Research Prize Competition 2021.
LAKSHMAN RAJALOGANATHAN
‘Paper money is going away’. ‘Bitcoin is a fraud’. Two distinct quotes from two distinct industry icons. The first from Elon Musk, an advocate for cryptocurrency who had accepted Bitcoin payments for Tesla cars and has been monumental in the recent cryptocurrency slump, due to his retraction of this implementation as a result of the use of ‘fossil fuels for mining’. The second quote was taken from an interview with Jamie Dimon, the Chief Executive officer at JPMorgan Chase. Following his labelling of the virtual currency to be fraudulent, in October 2020, JP Morgan commented that Bitcoin is solidly competing with gold, and that ‘the potential long-term upside for Bitcoin is considerable.’ On the 19th of May, a multitude of cryptocurrency plummeted in price and market cap. There were a plethora of reasons behind this "Crypto Crash" and the following dissertation will seek to analyse the reasons behind this plunge. It will also evaluate whether the cryptocurrency sector will spike to return to where it left off. I will attempt this by dividing the following answer into three sections: ‘What exactly are Cryptocurrencies?’, ‘The reasons behind the gargantuan Cryptocurrency crash’ and ‘Will the Cryptocurrency market recover?’.
What exactly are Cryptocurrencies?
Before digressing into the evaluation of causes, consequences and future impact of the crash, I believe it would be appropriate to first define the term ‘cryptocurrency’ as a fundamental point on which the concepts will be built upon during this dissertation. The term cryptocurrency describes "decentralised forms of digital cash that enable individuals to transmit value in a digital setting", which first achieved significant prominence due to the promise of greater affluence through trading.
You may be wondering ‘What distinguishes cryptocurrency from the typical pound or dollar?’. Firstly, cryptocurrency aims to be an electronic form of currency that is not owned or controlled by a specific individual or party; this is known as a "decentralised" model. Cryptocurrencies which are decentralised are more advantageous to use as there is not a bank that can change the ruleset or regulation of these virtual currencies. The diagram below illustrates the difference between the two. The image on the left is a centralised image representing the workings of a bank, in which users can only communicate via a single server. The image on the right, however, showcases a decentralised system that operates without any particular hierarchy. This is particularly beneficial for cryptocurrency as the whole concept is built around the easy to use user interface which cannot be regulated or restricted by the government or any other third party.
Another reason for supporting the decentralised system can be seen if we suppose that a bank had their database wiped without backups. It would be extremely difficult to restore users' previous data, hence increasing the bank's risk. Therefore they would need to pay increasing costs of production into security to reduce this risk.
The Reasons behind the gargantuan Cryptocurrency Crash
A vast amount of economists, analysts and cryptocurrency investors have publicly elucidated their own logical and reasonable reasons regarding this mammoth-like crash which showcases differences and similarities when compared with recent cryptocurrency plummets.
One possible reason many have alluded to for this dramatic price change is Tesla’s change in their use of Bitcoin. Following Tesla’s $1.5 billion investment into Bitcoin, on the 24th of March Tesla announced that they would be accepting Bitcoin as a means of payment for their products. What made this even better was Elon Musk consequently stating that Tesla would not be converting their earnings from Bitcoin into Fiat currency (physical/"normal" currency without an intrinsic value). This resulted in a ‘Bull Market’(investors are more confident in the future as they expect prices to continue growing for a certain period of time despite the volatility of cryptocurrency) forming. Investors believed that since Bitcoin would be used as a means of high-budget payments the price would increase, leading to high growth for this decentralised coin.
The graph below showcases Bitcoin’s price on the 24th of March peaking at £41,373 which is approximately £6,000 lower than its all-time high and is roughly £14,000 higher than the current price of £26,963 (as of the 20th of May).
However, subsequently, as alluded to in my introduction, Tesla decided to reverse the decision to accept Bitcoin due to environmental concerns over the mining of the cryptocurrency. This led to a market correction in Bitcoin and the whole cryptocurrency space. Many investors feared for a loss in the profit they made and so decided to sell Bitcoin, resulting in its value decreasing, It became less of a scarce commodity. This led to a "bearish" market (a situation in the marketplace when the price of most currency pairs are headed downward).
Another reason for the cryptocurrency crash is China’s government’s restrictions and regulations that are working against Bitcoin. A statement published on the People’s Bank of China’s WeChat account read “Recently, cryptocurrency prices have skyrocketed and plummeted and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order”. Furthermore, it was stated that cryptocurrency is not a real currency and “should not and cannot be used as currency in the market”. Again with an economic superpower in the form of China being reluctant to accept Bitcoin as a means of payment, investors became further "bearish" on Bitcoin, leading to them beginning to sell in order to maintain profits they would have made.
Will the Cryptocurrency space recover?
The cryptocurrency market is well renowned for its assets predominantly being volatile in nature, meaning that it is challenging for investors and analysts to predict when prices will peak over an all-time high or completely sink to a trough, which is why cryptocurrency is regarded as such a risky investment. Of course you should only ever invest what you can afford to lose. Many analysts believe firms will follow China’s regulations against Bitcoin, instead pursuing a further regulated cryptocurrency space at the minimum. Some are questioning whether the cryptocurrency space will ever recover. However, I personally believe that the cryptocurrency market’s recovery is inevitable and I question only how long it will take for the market to recover.
I believe that recuperation in the cryptocurrency sector is imminent as many investors are beginning to feel "bullish" on cryptocurrency. You may be slightly perplexed as many a cryptocurrency has faced a severe decline in price, but many are beginning to view this as an opportunity. An opportunity to invest in these phenomena at a discounted price in order to profit further when the cryptocurrency market springs back into its more common trends.
In conclusion, I believe that the cryptocurrency sector is a highly volatile market that experiences declines and peaks in prices on a daily basis. A plethora of reasons was responsible for this recent crash including Tesla and China. Due to the cryptocurrency industry having previously recovered from severe ‘crashes’ I believe that this crash will be no different and the market will return to its previous and more stable state due to the greater promise of gaining further affluence and profits by purchasing cryptocurrency at a lower price.
Have you considered writing for the Looking Glass? We accept articles from students and teachers on any academic subject. More information can be found here. This might be a great idea for something to do over the summer holidays to bolster interview and personal statement chances on university applications.
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