Even by the standards of the nerves of steel in the crypto universe, this was an impressive week.
An algorithmic stablecoin called TerraUSD plummeted from its dollar peg as the complex mechanism designed to ensure the peg suddenly turned against it, engulfing even the largest digital assets in a vortex of panic selling. Terms like “death spiral” entered the vernacular.
Midweek, the turmoil briefly dragged down the $80bn Tether stablecoin, a market giant and a key cog in many transactions, prompting its issuer to reassure investors all is well. Crypto-linked exchange-traded products were also hit, with one of them tracking the troubled Luna token falling 99% in a single day.
On Friday, a semblance of calm had returned to the crypto markets. But the tally was still lofty, with some $270 billion in crypto asset market value lost, according to CoinMarketCap, in the most volatile week for Bitcoin since October. Add to that the larger question: What other corners of the crypto universe could soon fall apart and cause a market crash like this?
“The ramifications for the space and what we have learned post-mortem are important and vital lessons as we move forward,” Mati Greenspan, founder of crypto research firm Quantum Economics, wrote in a newsletter published late Thursday.
Despite jumping as much as 8.4% on Friday, bitcoin is down 11% in the last five days, while the second largest token Ether has lost 20%. The smaller so-called altcoins have taken even bigger hits. Luna, the token that was supposed to help TerraUSD maintain its peg, has lost almost all of its value.
As the chaos surrounding TerraUSD (UST) deepened, the Terra blockchain that underpins it stopped processing transactions for the second time in less than a day. Terraform Labs said in a tweet from its verified account that validators, the entities responsible for verifying transactions on the blockchain, have taken the step of “devising a plan to reconstitute” the Terra network.
“We were surprised to see that a platform as big as Terra was closed. This is unprecedented,” said Mihir Gandhi, a partner at PwC and leader of its payment transformation business in India. “The world of stablecoins looks worrying.”
Dollar closes at $861 with a moderate decline due to the rise in copper and statements by the Fed president
More stable currencies
More traditional stablecoins like Tether, USDC and Binance USD, which hold dollar equivalents and other reserves to support their pegs, were trading at par with the dollar on Friday, suggesting that the collapse of UST has not yet eroded the trust in such tokens. However, regulators have taken note of the episode and promise to step up supervision.
There are other challenges facing cryptocurrencies, not least their tendency to trade more and more like tech stocks. Bitcoin’s 40-day correlation with the Nasdaq 100 Index currently stands at 0.82, near a record high, data compiled by Bloomberg shows. A correlation of 1 indicates that two assets are trading in perfect unison; a reading of -1 means they trade in opposite ways.
The closer link to equities has undermined the argument that crypto assets are a good diversifier in times of stress. Instead, they are being dumped alongside other asset classes in a tightening monetary policy environment.
The Federal Reserve Chairman Jerome Powell reaffirmed Thursday that the central bank will likely raise interest rates by half a percentage point at each of its next two meetings., and could possibly go further. Powell, who is trying to tame the fastest inflation in four decades, acknowledged in an interview with public radio show Marketplace that the Fed should have moved sooner.
Edward Moya, a senior market analyst at Oanda, said in an email late Thursday that Bitcoin’s plunge below $30,000 had created a “key entry point for many institutional investors.”
“Confidence has been fading in the cryptoverse, but it looks like we are nearing the end of the market sell-off,” he added. “Bitcoin has recovered from $25,424, but this won’t last if risk appetite doesn’t stabilize soon.”
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