Cryptocurrency storm

In recent days, a wave of panic has swept over cryptocurrency investors. The Bloomberg Galaxy Crypto Index fell to 1557 points after breaking the ceiling of 2700 points earlier in the year. In a few months, the value of the crypto market has halved. In May, the queen of crypto, Bitcoin, fell below the $30,000 mark, setting off a wave of corrections across all cryptocurrencies. Since then, bitcoin has stabilized near this threshold: the wind of panic seems to have died down.

If the correlation between bitcoin and other cryptocurrencies was known to investors, then the last few weeks have once again demonstrated a very strong correlation of digital currencies with US technology stocks. On the one hand, crypto assets and the Nasdaq have benefited from very flexible central bank monetary policy. Excess liquidity in the markets has supported these assets during the Covid era. On the other hand, US tech companies are exposed to cryptocurrencies. Some of them, including Tesla, have invested some of their money in cryptocurrencies. So the car firm announced that it had nearly $2 billion in bitcoin and offered its American customers to temporarily pay for their purchase in bitcoin.

Democratization of cryptoassets

Since then, the economic and geopolitical context, marked by slower growth and a return of high inflation, has forced central banks to tighten monetary policy. The Fed has announced a historic hike in its key rate, and the ECB is due to follow the US decision in July with its first rate hike since 2011. The era of free money seems to be over. The fight against inflation has again become the concern of central banks.

While institutional investors have placed some of their cash in cryptocurrencies, the change in the direction of the monetary policy of the Fed and the ECB is causing new arbitrage in portfolios. With rates rising in the US, institutional investors are defending their positions in US bonds by moving away from equities as well as crypto assets, thereby amplifying the downward movement seen in recent days.

Because this is really a mini hack that has been seen in cryptocurrencies. In the first half of May, bitcoin fell from $40,000 to today’s stabilization around $29,000. An important technical threshold for this asset. Professionals in this asset class see two scenarios in the near future. An optimistic scenario with stabilization at the threshold of $29,000 with anticipation of growth. This opportunity can be interesting to create a position and strengthen it. The second scenario involves a further drop in crypto as Bitcoin drops to $25,000.

Unstable stablecoins

The highly volatile nature of cryptocurrencies with regular and significant bullish and bearish phases attracts retail investors looking for quick profits. According to a study by the ECB, up to 10% of households can hold cryptocurrencies in the Eurozone, with varying proportions by country, limited risk, and a slight preponderance of modest holdings of less than €1,000.

This characteristic provides some protection for private investors, which is needed, as evidenced by the fall of the Luna protocol with the UST stablecoin, which wiped out $40 billion in just four days. This event is an earthquake in the crypto community. Terra, like other stablecoins, fell despite its algorithm and arbitrage play, which should have kept its value at around $1.00. To ensure parity with the dollar and bolster the reliability of the protocol, the Luna Foundation recently created a reserve of $1.5 billion in bitcoin. Faced with a bearish move, the Luna Foundation liquidated all of its bitcoin holdings to no avail in an attempt to maintain the value of its UST stablecoin. A fiduciary framework will not be enough to protect a stablecoin that will pull other cryptocurrencies with it, with Bitcoin leading the way.

In addition to this algorithmic misadventure, the very principle of algorithmic stablecoins is called into question. The promise of issuing a stable, algorithm-only digital currency for transactions has skyrocketed along with the valuation of the Luna/UST ecosystem.


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