The billionaire creator of Ethereum already expected the collapse of cryptocurrencies

The billionaire creator of Ethereum already expected the collapse of cryptocurrencies

May 21, 2021 3 min read

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.

This week, the world of cryptocurrencies experienced a severe collapse, losing about 35% of its total capitalization in one day . Although this took investors and markets by surprise, Vitalik Buterin , the billionaire creator of Ethereum , revealed that he already expected the bubble to burst.

In an interview with CNN Business , the 27-year-old mogul said that cryptocurrencies are “in a bubble,” but it is difficult to predict when it will burst. “It could be over by now … It could be over in months ,” Buterin said.

According to the specialized cryptocurrency portal CoinMarketCap, on Wednesday morning the price of Ethereum fell to $ 2,092 . This is 41% less than the $ 3,559 it cost a day earlier. Although it managed to recover to exceed $ 2,900 on Thursday, today it is trading at $ 2,283 per unit with a downward trend.

Source: CoinMarketCap.

These figures are still a long way from the all-time record price of $ 4,337 that it reached on May 12, according to data from Coindesk .

Of course, the fall of Ethereum impacted the public portfolio of Vitalik Buterin , who just three weeks ago was crowned the youngest billionaire in the world . His account went from $ 1.1 billion to $ 870 million in a single day.

However, the crash of digital currencies did not surprise the Russian-Canadian programmer.

“We’ve had at least three of these big crypto bubbles so far (…) And quite often, the reason the bubbles end up stopping is because some event happens that just makes it clear that the technology isn’t there yet,” said the founder of Ethereum.

Currently, Ethereum is the second currency by market capitalization, only behind Bitcoin . One of the reasons for its growing popularity is that it is used in NFT transactions or non-fungible tokens , the new ‘crypto’ sensation .

The abrupt collapse of cryptocurrencies can be explained by two crucial events that occurred this week. First, on Sunday May 16, Elon Musk stated on Twitter that Tesla would no longer accept Bitcoin as payment . Second, the announcement that China would prohibit transactions with cryptocurrencies to the country’s financial institutions.

Bitcoin, Ethereum prices in free fall as China plans crackdown on mining and trading

Getty Images

Bitcoin, Dogecoin, Ethereum and every cryptocurrency available had a terrible week. Prices began falling Wednesday following the news of China reaffirming its ban on the crypto services for its financial institutions. Then, after a brief rebound Thursday, prices fell again Friday when a statement from a meeting among top Chinese officials called for what could be disastrous actions against cryptocurrency.

“We should be more alert and look for potential risks,” a statement from the meeting said, according to Coindesk. “We should crack down on bitcoin mining and trading activities and prevent individual risks from being passed to the whole society.”

The value of Bitcoin fell sharply after the news from the meeting came out Friday morning, reaching a low of $33,590. It was at a little over $41,000 just hours before. Dogecoin and Ethereum also saw their values slip, by 10% and 12%, respectively.

The cryptocurrency industry had its first gut punch come Tuesday, as the China Internet Finance Association said it won’t allow the country’s financial institutions to partake in any business related to cryptocurrency, due to the volatile nature of the digital coins, according to a Chinese media report spotted by Coindesk on Wednesday. This position isn’t new. China took a similar stance back in 2017, which also resulted in a massive Bitcoin selloff.

“The price of virtual currency has soared and plummeted, and virtual currency trading speculation has rebounded, which has seriously violated the safety of the people’s property and disrupted the normal economic and financial order,” the report said (via Google Translate).

Coindesk

Bitcoin’s price dropped Wednesday morning to a low of just above $30,000, then rebounded to $37,000, according to Coindesk – a loss of 12% for the day. Ethererum and Dogecoin also saw drops at about the same time.

Since the start of the pandemic, Bitcoin, along with other cryptocurrencies, saw its value climb, reaching a peak of almost $65,000 in April. Since then, the price has been coming down because of growing concern about the large energy consumption required for Bitcoin. Last week, Tesla CEO Elon Musk said his company would no longer accept Bitcoin as payment because its use is increasing the burning of coal for power.

The popularity of Bitcoin and other cryptocurrencies attracted the attention of President Joe Biden. The US Treasury proposed a requirement for individuals to report any cryptocurrency transfers over $10,000 to the IRS. The proposal is also included in the president’s American Family Plan. A similar rule is already in place in banks for any deposits over that same amount.

Ethereum Price: Can It Reach a New All-Time High?

Ethereum took a hit like most cryptos did this week, but where can it go from here? Updates to the network are on the horizon and may help to boost its price.

Ethereum, along with all other cryptos, experienced a huge sell-off in the last week. Just this month Ethereum reached over $4,300. Since then it dropped as low as $1,950 a now rests at around $2,500.

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The drop from its all-time high represents a 42% decrease. But why such a harsh drop? What happened to make the cryptocurrency plummet from the top, and can it climb back to a new all-time high?

Correlation With Bitcoin

Ethereum, as with most cryptocurrencies, is highly correlated to Bitcoin’s movements. While Bitcoin and Ethereum are vastly different in their design and use cases, the majority of people still lump all cryptocurrencies together as the same thing. With Bitcoin being the most popular, a drop in Bitcoin can lead to drops in the rest.

This will likely change as people slowly gain more exposure to cryptocurrencies and how they work, but right now they are all correlated in their price movements.

Due to this view that cryptocurrencies are all largely the same, when Bitcoin drops so does everything else, and Bitcoin dropped hard this week.

So, if Ethereum follows Bitcoin’s fluctuation, then why did Bitcoin drop?

Tax Day

Tax day was on the 17th. Historically, tax day is correlated with down markets as people sell off their investments to pay due taxes.

Tax day affects crypto and traditional markets too. On the 17th, the S&P 500 also had a rough day.

Elon Musk and Tesla

Though many crypto enthusiasts would not admit that one company and its billionaire figurehead has the power to affect Bitcoin’s price, Bitcoin tumbled sharply right after Tesla announced that it would stop accepting the crypto for its cars.

After the announcement, Musk engaged in various arguments on Twitter regarding Bitcoin’s energy efficiency, leading many to fear that Tesla could take it one step further and sell its Bitcoin holdings worth well over $1.6 billion.

While concerns over Bitcoin’s energy use grew, Musk reassured Twitter that Tesla had “diamond hands” and would not be selling.

Even though there was a strong sell-off, those leaving the market seemed to be newer investors panic selling as addresses that are accumulating Bitcoin have continued to grow through the drop.

Fears of Regulation

Perhaps one of the largest drivers of fear in the market was fresh concerns over regulations. Both the U.S. and China made announcements about coming regulations for taxes and other things.

In the U.S., the Treasury Department announced that it would begin to require any transfer of $10,000 or more to be reported to the IRS, though it is unclear how such a law would actually be enforced in the real world.

A report released by the Treasury Department said that cryptocurrencies were a growing concern.

“Still another significant concern is virtual currencies, which have grown to $2 trillion in market capital-ization. Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”

China also called for tighter regulations around mining and trading behavior. A statement from China said that it is time to “crack down on Bitcoin mining and trading behavior, and resolutely prevent transmission of individual risks to the social field.”

The country’s statement continued, saying “It is necessary to maintain the smooth operation of the stock, debt, and foreign exchange markets, severely crack down on illegal securities activities, and severely punish illegal financial activities."

Where Does Ethereum Go From Here?

While the whole cryptocurrency market has followed Bitcoin in its steep decline, Ethereum has a lot of upcoming updates that could help to lift the crypto out of the hole.

In the next year or so Ethereum will experience massive changes to its system known as Ethereum 2.0. These changes will increase transaction speeds and greatly reduce the cost to move money on the network. In this update, Ethereum will move to a proof-of-stake consensus system instead of proof-of-work.

Right now, transactions on the Ethereum network can cost $100 or more, making transactions of anything under that amount impossible and not worth it. After Ethereum’s update, this issue will go away, greatly reducing the barrier to entry and allowing anyone to move money for far smaller fees.

Why does this matter for Ethereum’s price? It matters because with lower fees the network is suddenly opened up to more people that could not previously afford to use it. This increased use can help to bolster the decentralized financial ecosystem on Ethereum and in turn its price.

Other than moving to proof-of-stake, Ethereum has another update that will change the way transaction fees work and help to lower inflation, thus making it more scarce. The update, called EIP-1559 (Ethereum Improvement Proposal), will lower the volatility of transaction fees by burning a portion of the fees, rather than giving it all to miners.

Though this will cause miners to make less money, it will allow more people to use the network for smaller transactions. This update will replace the auction-style system that exists today for a standard rate known as the base fee. Instead of miners setting the fees the network does, and instead of the fees all going to miners most of them are burned, helping to lower Ethereum’s inflation rate.

The combination of lower fees and a lower barrier to entry for more individuals, along with a new system to lower the inflation of Ethereum, are both good signs for the crypto’s price. Should these new updates prove effective, Ethereum’s ecosystem and its price stand a good chance to grow.