The collapse of the cryptocurrency market.. Is it time to move away from investing in crypto?

Let's start with the next direct sentence: the cryptocurrency market is not a safe place now, if you look in any direction, you will see red flags.

“Bitcoin” and “Ether” reached their lowest levels since 2020, and the situation for altcoins such as “Dogecoin” and “Cardano” was much worse, this volatility in the cryptocurrency market will give it a worse reputation than it is undoubtedly, especially since the conditions The economic storm we are currently experiencing is not only leading to a decline in cryptocurrencies, but even the stock market.

Last week, TerraUST, a system that was supposed to function much like a traditional bank account, but backed by a cryptocurrency called Luna, collapsed.

Luna lost 97% of its value in just 24 hours, destroying some investors' life savings.

Luna's price has fallen from $116 in April to a fraction of a penny at the time of writing.

Such an internal collapse has been seen in other small-cap coins in the past, but never in something the size of Luna, whose market capitalization topped $40 billion just last month.

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Luna and stablecoins

A stablecoin like Luna is a cryptocurrency with additional features that have made it the focus of everyone's attention.

Normally, to generate cryptocurrency you would mine it on advanced computers, but rather than being “mined” by an open, distributed network of computers performing a mixture of arithmetic (such as bitcoin for example), stablecoins derive their price from The value of another underlying asset and not this process.

The primary use of the stablecoin is to facilitate transactions on cryptocurrency exchanges. Instead of buying “Bitcoin” directly with fiat currency (fiat money), such as the US dollar, traders often exchange fiat currencies for a stablecoin, and then trade with the stablecoin for another cryptocurrency. Like Bitcoin or Ether.

In this way, stablecoins are a bit like nightclub poker chips for cryptocurrency exchanges.

Besides, although advanced crypto traders may use stablecoins for a variety of purposes, including storage and lending, most beginners use them to ease trading fees. for stablecoins which is remittances;

No money transfer across international borders.

moment of collapse

But the most important difference between cryptocurrencies and stablecoins is that the traditional cryptocurrency is subject to decentralization;

Where it is governed by the masses and not by an individual or a specific government.

A stablecoin differs in that it is issued and controlled by a central authority.

“Terra”, for example, is based on blockchain technology, just like “Ethereum” and “Bitcoin”, but while “Ethereum” originally produces “Tether” stablecoins, that is, “Tether” is based on the “Ethereum” currency. With its value tied to it, Terra Labs in South Korea mainly produces the Luna coin, which is also linked to another coin, Terra UST, both of which are authentic tokens of the Terra network.

Normally, to create a 'UST' you need to destroy a 'Luna'.

For example, last week, you could exchange 1 Luna for 85 USTs, but Luna would be destroyed, or as they call it "burning" Luna, this deflationary protocol is meant to ensure Luna grows on In the long run, as more people buy UST, more Luna will be burned, making the remaining Luna stock more valuable, because the fewer coins on offer, the more valuable it is.

To entice traders to burn Luna, the creators offered an insane 19.5% return on “keep”, which is basically a crypto term meaning, in short, earning 19.5% interest on the loan, through what they called the Anchor protocol.

Instead of keeping your savings in the bank at an interest rate of 0.06%, the idea is to transfer your money to UST where you can earn close to this massive percentage of interest.

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One UST can always be exchanged for $1 of Luna, so if the UST slips to 99 cents, traders can profit by buying a huge amount of it and exchanging it for Luna, with a profit of 1 cent each. treatment.

The effect works in two ways: people who buy UST raise the price, while burning UST while switching to Luna reduces supply.

It all began on Saturday, May 7, 2022, as the $2 billion UST was taken out of Anchor and hundreds of millions sold out on the spot. Huge sales pushed the price to 91 cents.

Traders tried to capitalize on this speculation, exchanging 90 cents of the UST for $1 of the Luna, but then a speed bump appeared, as the $100 million UST could be burned just to exchange it for the Luna. " Daily.

And here was the big catastrophe, because of that, more than 15 billion dollars were spent through "Luna" and "UST" alone.

A lot of people lost a lot of money in the meltdown, the damage to the whole ecosystem in Terra was not contained, and a lot of Luna and UST owners were

They have sold other coins in bulk from their crypto wallets to offset some of the damage, causing the entire market to plummet.

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A side effect of a bigger problem

The decline in cryptocurrencies is part of a broader decline in digital assets, driven by higher interest rates, inflation, and economic uncertainty stemming from Russia's invasion of Ukraine.

These factors exacerbated the so-called “epidemic hangover” that began as life returned to normal and people pulled out of some digital platforms, hurting stock prices of companies such as Zoom and Netflix that thrived during the shutdowns. .

There is no doubt that cryptocurrency price movements are affected by interest rates, inflation, and other economic factors that can affect how confident people are to invest their money in risky alternative assets.

With higher interest rates, savings accounts become more attractive, and some people may be more comfortable putting their money where they can get predictable returns.

When prices fall rapidly as in the case of Luna, this can compound the pressure on the market by forcing some investors to release cash so that they can meet their other obligations.

Another factor that could lead to investor pessimism, and could lead to the collapse of cryptocurrencies more broadly, is the government actions that regulators are taking around the world.

China has been particularly aggressive in this direction. On September 24, 2021 for example, prices fell after the Chinese government declared cryptocurrency transactions illegal and said that offshore exchanges were not allowed to deal with people in China.

On the other hand, the Biden administration in the United States has ordered federal agencies to develop detailed plans for the supervision of digital currencies.

Such developments are a reminder that cryptocurrency remains a relatively new technology whose full implications for the global economy are not yet clear.

Cryptocurrency prices are volatile, and unexpected events can cause prices to plummet.

But will prices rebound to rise again one day?

Upcoming

For those who have invested in cryptocurrencies for years, massive gains and losses are nothing new.

For example, Bitcoin hit a previous record high of nearly $20,000 in December 2017, but by December 2018 the price was below $3,500.

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In 2021, cryptocurrency prices soared to new highs backed by ultra-low interest rates, and by November 2021, Bitcoin reached an all-time high of $68,789.

The rest of the cryptocurrency market followed suit, with Ethereum (ETH), the second largest cryptocurrency, breaching its record high in November 2021 to peak at $4,891.

On the other hand, 2022 presented a different story. High inflation in the United States and the world forced central banks to step in to tame inflation by cutting cheap liquidity.

The US Federal Reserve has turned increasingly hawkish, pursuing a 25bp rate hike in April, with a 50bp rate hike in May.

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It was easy to predict that the price of "Bitcoin" would reach the value of $100,000 late last year, surpassing its last all-time high in November.

But after what happened in 2022 until now, the prediction game has become more complicated.

The most extreme crypto skeptics say Bitcoin will drop as low as $10,000 over the rest of 2022, but others say the cryptocurrency can still climb to $100,000 as many experts predicted late last year, only on a slower schedule.

(6) In the end, any asset with ups and downs, volatility is nothing new.

The Terra debacle may be the start of a long crypto winter to come, but on the bright side we're not all lost. Focus on development within the blockchain industry, which is what you really need to reach its peak, perhaps someday.

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