Crypto Crash: What Investors Need to Know
Since its high in November 2021, Bitcoin’s value has decreased by more than half, leading to the collapse of the cryptocurrency industry as a whole. Investors could be alarmed by the sharp drops in Terra (LUNA) and TerraUSD (UST). Who would have imagined that both cryptocurrencies would see such a sharp decline while they were enjoying their honeymoon periods one month ago? Investors withdrew their funds as a result of the negative attitude that swept throughout the cryptocurrency market, which led to Tether (USDT) losing its peg to the dollar.
The week dispelled numerous misconceptions about the bitcoin industry in addition to teaching individuals to invest cautiously.
KEY TAKEAWAYS
- The cryptocurrency markets are in disarray after losing $600 billion in one week.
- For the first time since July 2021, Bitcoin fell below $30,000, which is less than half of its November 2021 peak.
- Currently trading for less than $1, TerraUSD and Terra have suffered the most.
Bitcoin May Not Be the Best Hedge Against Inflation
For the past few months, the cryptocurrency market has been advancing in lockstep with the stock market. In March 2022, the correlation between the price of Bitcoin and the S&P 500 reached a high of 17 months, showing that both the cryptocurrency and stock markets are heading in the same direction.
A popular hedge against inflation is bitcoin. Inflation thus has no impact on the leading cryptocurrency. It might not always be the case, at least according to what the market saw this past week. Investors in cryptocurrencies were impacted by high inflation and a stricter monetary policy, which caused the market to crash. These occurrences demonstrate that the market for cryptocurrency is expanding and that it is gaining popularity.
Stablecoins Aren’t Always Stable
The value of stablecoins is intended to remain stable. In addition to other cryptocurrencies, they are backed by fiat money such as the US dollar, gold, and others. Terra and TerraUSD were severely impacted by the Bitcoin meltdown. This is due to the way Terra operates.
Two native tokens of the Terra network are Terra (LUNA) and TerraUSD (UST). By employing algorithms, TerraUSD seeks to keep its peg to the US dollar. Therefore, in order to produce UST, one must burn the same number of LUNA in dollars. The other direction has the same effect. The protocol works in this way to keep the price of UST stable.
The Luna Foundation Guard (LFG), who created Terra, planned to add Bitcoin to its reserve in March 2022 to give its stablecoin greater cushion, according to TechCrunch.com. The concept was that UST would be stabilized by Bitcoin backing in the event that something went wrong with the pricing. Sadly, it didn’t happen, and as a result the stock market, Bitcoin, and ultimately the whole crypto market crashed.
According to coingecko.com, Terra (LUNA) is presently trading at $0.000000999967 per token, a 14.359% decrease from its all-time high of $119.18 in April 2022. According to coingecko.com, TerraUSD (UST), which no longer has a dollar peg, is presently trading at $0.13.
The carnage spread to the other stablecoins, including the biggest stablecoin, Tether (USDT), which lost its link to the dollar. UST’s price dropped to an all-time low of $0.6841 on May 12 at one point. Therefore, the tokens owned by USDT holders are worth less than $1. According to coingecko.com, the cryptocurrency is presently back on track and trading at $1.
The Bottom Line
This week’s crypto meltdown provided a wealth of lessons. Even the most popular alternative currencies, like Terra, may experience sudden losses and struggle to survive. Decentralized algorithm stablecoins like TerraUSD have an intriguing premise, but they require a more effective approach. In times of crisis, centralized stablecoins like Tether (USDT), which are frequently accused for having insufficient currency reserves, appear powerless.
This week will be remembered as a turning point in the history of the cryptocurrency sector and a reminder to fans that more work still needs to be done.
What is a cryptocurrency?
A cryptocurrency is a type of digital or virtual currency that uses encryption to protect it against counterfeiting or duplicate spending. Blockchain technology, a distributed ledger enforced by a dispersed network of computers, is the foundation of many cryptocurrency decentralized networks. The fact that cryptocurrencies are often not issued by any central authority makes them potentially impervious to intervention from or manipulation by governments.
What is the stock market?
The term “stock market” often refers to a group of exchanges and other locations where shares of publicly traded businesses can be purchased, sold, or issued. Such financial operations are carried out through established official exchanges (physical or electronic) or through over-the-counter (OTC) markets that function in accordance with predetermined rules.
What are stablecoins?
Cryptocurrencies known as stablecoins have their value anchored to another coin, good, or financial instrument. The extreme volatility of the most widely used cryptocurrencies, such as Bitcoin (BTC), has rendered such assets less suited for widespread usage in transactions. Stablecoins attempt to offer a solution to this situation.
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Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know
Crypto Crash: What Investors Need to Know