The spring of 2021 has ended with a major cryptocurrency market crash with the two top coins by market cap, Bitcoin and Ethereum, dropping 50% from their ATH (all-time highs). Why did what had been such a fabulous bull run crash so hard? Was it the Great Fudmaster, Elon Musk?
Yes. He started it. The real lows, however, had a more insidious cause.
1. Leverage Trading
Insurance companies have been providing optional coverage to traders using cryptocurrency exchanges in the form of the option to trade on margin.
Leverage trading is a form of credit that allows traders to buy more cryptocurrency and non-fungible tokens than they have fiat currency or stable coins.
Basically, someone with a $1000 could buy $20,000 worth of Ethereum at 20x leverage, thanks to certain insurance companies.
This leverage comes at a steep price, however. When a borrower buys a digital asset on leverage, the lender has the power to force the sale of the digital asset should the cryptocurrency go down to a particular price, the liquidation price.
If you wonder why so many retail investors were selling at a loss, it was not out of fear. Many of those sales were the liquidation of digital assets that people had purchased through leverage trading.
That is why leverage trading is so dangerous, and if you insist on doing it, you should at least familiarize yourself with the complex world of the crypto space through resources like CryptoVantage.
2. Car Insurance
Many have no idea how the car insurance market leverages cryptocurrency. When you think about it, a comprehensive car insurance package could be expensive.
Rather than just collision coverage or liability coverage, a comprehensive coverage auto insurance policy has to provide comprehensive insurance for one’s own vehicle regarding a variety of hazards: vandalism, flood and other natural disasters, theft, etc.
Depending on the insurance company, some auto insurers may accept cryptocurrency in addition to fiat currency: Bitcoin, Litecoin, etc. In addition, credit card payments are normal for auto insurance companies and Visa is now accepting Ethereum.
In fact, certain auto manufacturers have been accepting cryptocurrency and that was what led to the recent crash of the cryptocurrency market. In March 2021, Tesla had started accepting Bitcoin as payment.
In May of the same year, Elon Musk announced that Tesla would no longer be accepting Bitcoin as payment due to environmental reasons caused by the energy use of Bitcoin mining.
This was the first time that a single person had been able to crash an entire cryptocurrency bull market and the first time that an auto manufacturer had played a role in the crash of a crypto market, regardless of the car’s value.
3. Security of Digital Assets
Due to the danger of hackers and malware, crypto enthusiasts have felt the need to protect their digital assets through an assortment of security measures: private keys, a private key for a custodial wallet, cold storage, digital wallets, crypto wallets software wallets, and hardware wallets like the Trezor Model T.
One such security measure is to have insurance products for the digital assets themselves. Coinbase actually provides its own crypto wallet for its customers.
The blockchain realm is complicated in its own right and could potentially be even more complicated in insurance terms. The average cost of insurance coverage for digital assets like cryptocurrencies and non-fungible tokens varies from digital asset to digital asset, cryptocurrency exchange to cryptocurrency exchange and crypto wallet to crypto wallet.
This article is just for informational purposes. Still, if you think that protection through insurance products is the best way to safeguard your hard-won cryptos, it would be good to talk to your financial advisor or do your own research.