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Bitcoin, stablecoins: why this big plunge?

Audio 04:15

Representation of the virtual currencies Bitcoin, Ethereum, DogeCoin, Ripple and Litecoin.

© REUTERS - Dado Ruvic

By: Pauline Gleize Follow

3 mins

Cryptocurrencies were particularly hard hit last week.

Bitcoin even temporarily fell below the $30,000 mark and it is far from the only one to have plunged.

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The slope is very steep.

Bitcoin, the queen of cryptocurrencies

may have recovered a little since Thursday and is again worth around 30,000 dollars, it still shows a drop of 23% over one month according to the Boursorama site.

Last week, it even fell to $25,000, a 60% drop from its all-time high last November.

The other major cryptocurrencies fared no better: ether, the second largest by market size, and dogecoin lost 33% and 41% respectively in seven days.

In total, the cumulative capitalization of all cryptocurrencies has halved compared to last November.

And despite an attempt to rebound on Friday, Scottie Siu, chief investment officer of Axion Global Asset Management, interviewed by Reuters, does not "

".

 Unstable stablecoins

This time, even “stablecoins” are affected.

However, a stablecoin is precisely an asset supposed

have a constant value against a reference currency

But lo and behold, the most important of these tokens, the dollar-backed Tether, faltered, worth just 95 cents on Thursday, before recovering.

The

Terra more than wavered, it rolled down the slope.

According to the specialized site CoinGecko, its value fell on Friday to around 10 cents.

At the beginning of the week, it was equivalent to 1 dollar. 

Monetary tightening

So what explains this cold snap on cryptocurrencies?

In summary: the economic context combined with risk aversion.

Despite a slowdown in the economy linked to the war in Ukraine and China's anti-Covid policy, inflation is forcing the US Federal Reserve (FED) to raise its key rates.

Bonds therefore become more attractive.

This cocktail led investors to abandon the stock markets and in particular the shares of tech companies whose performance had been boosted by the easy money of accommodating monetary policies.

Cryptocurrencies have followed suit as the dollar acts as a safe haven.

And the appetite of investors in cryptocurrencies has undoubtedly been further cut by the setbacks of Terra.

Misalignment of planets

The reasons for its stall against the dollar are related to its operation.

There are two systems to ensure stability.

First example: the organization that publishes Tether ensures that it holds reserves of liquid and safe assets equivalent to the number of Tether issued.

This is not the case of Terra which was the main “algorithmic stablecoin”, the second model

The creators guaranteed its stability by automatically making arbitrations with another cryptocurrency: Luna.

The method had to stick to the philosophy of decentralization of cryptocurrencies since the decisions were dictated by algorithms.

But, the price of Luna ended up falling to the point of making arbitration impossible for the algorithm.

It must be said that the Luna, which was worth more than 100 dollars in April, is now trading for less than a cent.

Such a debacle that Reddit forum moderators pinned the numbers of suicide prevention centers in a slew of countries in a conversation.

Less 55% in six sessions

Companies are also caught in the turmoil.

These declines affect listed companies specializing in crypto-assets.

This is the case of Coinbase, the main transaction platform in the sector

Its market value has melted by 55% in six sessions.

The software publisher MicroStrateg

invested its cash there in Bitcoin and had even borrowed to buy even more.

Its stock also tumbled.

Some professionals in the sector, however, seek to put the fall of Bitcoin into perspective.

We have already seen, in the past, its course take off again.

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• Currencies

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• Cryptocurrencies