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Cryptocurrencies: the market is experiencing an unprecedented crash, the worst is yet to come? Transcription – magazine ₿

Somewhere in Omaha, Warren Buffett and Charlie Munger must be smiling as the cryptocurrency turmoil highlights their disdain for the sector.

Why it’s important: Cryptocurrency has been more of a side topic for the broader market, but it’s slowly moving from side to side. Many small investors invested in cryptocurrencies when the market exploded – money they may not get back if they don’t “hang on” in the long run.

Whether you agree with the Oracle of Omaha or not (he infamously called Bitcoin “the death of the rat”), one thing is certain: these are dark days in the crypto world.

Understand this accident

The sector is rocked by similar, if not identical, dynamics that are pushing lower equities and higher bond yields (i.e. monetary tightening, higher rates), increasing selling pressure:

  • Bitcoin is at its lowest level in a year at $30,000, more than 50% below its peak reached last fall.
  • Shares of Coinbase, a cryptocurrency trading platform, are down 25% on the day and are down over 80% from their IPO price.
  • Terra (UST), a stablecoin designed to trade at par with the dollar, is now trading well below that level. And Luna, caught in the crossfire at UST, lost 96%… that day.

The cryptocurrency market crashed this week. Bitcoin has been hovering between $28,000 and $30,000 for the past two days, less than half the value of its November all-time high, while Ethereum barely broke above $2,000, also less than half the value of its November peak. A significant part of the responsibility lies with the cryptocurrency called TerraUSD.

TerraUSD is one of the largest so-called “stable” cryptocurrencies, which means that it should have a value close to that of a fiat currency – in this case, the US dollar. Cryptocurrency investors see stablecoins as a kind of checkpoint in the crypto game, “safe” places to store their investments when they are not buying more volatile currencies. And yet, this week TerraUSD fell to 30 cents at its lowest point and is still just above 80 cents. As FastCompany notes, TerraUSD “usually fluctuates within a few thousandths of a percent.”

Unlike other stablecoins, TerraUSD is pegged to the cryptocurrency and not directly to the fiat currency with which it is supposed to maintain parity. In the case of TerraUSD, it is tied to Luna, which is built on the same blockchain. TerraUSD and Luna reserves are created and destroyed algorithmically to maintain their relative value, bouncing less than a cent in each direction to be bought and sold – trading between them also helps stabilize their value.

Until this week, when the value of Luna dropped over 75%, causing the value of TerraUSD to drop. It was then that TerraUSD creator Do Kwon opened up his reserves, the $3.5 billion worth of bitcoins he bought to support TerraUSD, and sent shock waves through the already volatile cryptocurrency market. As reported by Reuters, cryptocurrencies lost $800 billion in value in a month, and the Wall Street Journal pointed out that NFT sales are also falling sharply.

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As to why the value of the moon has fallen, it’s not very clear. CoinDesk attributes this to a “series of large withdrawals from Anchor Protocol,” the stablecoin exchange, as well as TerraUSD’s large withdrawals from the Curve stablecoin market. Theories that this was an “attack” that was “deliberate and coordinated” have circulated in the crypto community.

Today’s attack on Terra Luna UST was deliberate and coordinated. Huge 285M UST dump on Curve and Binance by one player followed by massive shorts on Luna and hundreds of tweets. Clean staging. The project is getting in the way. 🌝 on the right track!

Painting

Meanwhile, it was revealed that prior to the creation of TerraUSD, Do Kwon co-founded a failed stablecoin called Basis Cash under the pseudonym “Rick Sanchez”, after the Rick & Morty character. Which, frankly, is the perfect cherry on top of this whole mess.

What’s next?

The world’s largest stablecoin also fell below its theoretical 1:1 peg against the dollar on Thursday as the global crypto sell-off worsened.

In addition, “UST is fortunately still relatively underused in the crypto ecosystem and notably has no direct impact on Ethereum projects. It is likely that the project will be able to survive at least in the short term, and if you look for a positive moment in these troubles, then it will eventually strengthen the security of the entire market, either by the disappearance of a project with an unstable foundation or by ensuring and maintaining its operation, ”Coinhouse emphasizes in note posted today.

Washington remains committed to regulating cryptocurrencies and classifying assets as stablecoins, which some say should be treated like a bank given their explosive growth. The lack of clarity raises questions about whether investors can be cured if Terra fails.

“This UST situation could give governments like the United States an excuse to further restrict stablecoins,” George Harrap, co-founder of the Solana-focused Step Wallet Dashboard, told TechCrunch.Finance. “We’ve seen this before; however, stablecoins have received a lot of regulatory attention and this is likely to increase.

In a bearish cryptocurrency market, the big question is: What does all this mean for the future of stablecoins? And what will cause the loss of confidence in the world’s largest stable? To be continued…

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