Markets
What Investors Need to Know
Bitcoin’its value has fallen by more than half from its peak in November 2021, which caused the entire cryptocurrency market crash. Terra (LUNA) and TerraUSD (UST) have both seen steep declines that investors may be scared. When both cryptocurrencies were enjoying their honeymoon period a month ago, who would have thought that they would face such a steep decline? The weak sentiment in the cryptocurrency market has led investors to pull their money, causing Tether (USDT) to lose its peg to the dollar.
The week not only taught investors to invest carefully, but also destroyed many Cryptocurrency Myths market.
Key points
- Cryptocurrency markets are in turmoil: they lost $600 billion in a week.
- For the first time since July 2021, Bitcoin has fallen below $30,000, which is less than half of its November 2021 peak.
- TerraUSD and Terra were the pairs that suffered the most, now trading below $1.
Bitcoin May Not Be the Best Hedge Against Inflation
The cryptocurrency market has been moving in sync with the stock market in recent months. The correlation between Bitcoin and the S&P 500 reached a 17-month high in March 2022, proving that the cryptocurrency and stock markets are moving in the same direction.
Bitcoin is often seen as a good hedge against inflation. This means that inflation does not affect the leading cryptocurrency. This may not be true every time; at least, that is what the market has seen this week. High inflation and tighter monetary policy have also affected cryptocurrency investors, resulting in a market crash. These developments show that cryptocurrencies have a bigger market now and are becoming more widespread.
Stablecoins are not always stable
Stablecoins are supposed to hold their value. They are backed by fiat currencies like the US dollar, gold, and even other cryptocurrencies. The collapse of Bitcoin has had a negative impact on Terra and TerraUSD. The functioning of Terra is to blame for this.
Terra (LUNA) and TerraUSD (UST) are two native tokens of the Terra network. TerraUSD aims to maintain its peg to the US dollar using algorithms. So if you want to mint UST, you need to burn the equivalent dollar amount of LUNA. It works the same way in reverse. Here’s how the protocol maintains the price of UST.
In March 2022, to add more cushion to its stablecoin, Terra’s creator, Luna Foundation Guard (LFG), decided to add Bitcoin to its reserve, according to TechCrunch.com. The idea was that if something went wrong with the price, Bitcoin’s backing would help stabilize UST. Unfortunately, that didn’t happen, and the stock market crashed, Bitcoin crashed, and then the entire cryptocurrency market crashed.
Terra (LUNA) is currently trading at $0.000000999967 per token, up 14.359% down from its all-time high of $119.18 in April 2022, according to coingecko.com. TerraUSD (UST), which has lost its peg to the dollar, is currently trading at $0.13, coingecko.com reported.
The bloodbath has spread to other stablecoins, such as Tether (USDT), the largest stablecoin, which has lost its peg to the dollar. On May 12, the price of UST hit an all-time low of $0.6841 at one point. This means that USDT holders have tokens worth less than $1. However, the token is currently back on track, trading at $1, according to coingecko.com.
The bottom line
The cryptocurrency crash has taught us many lessons this week. Even major altcoins like Terra can suffer losses overnight and struggle to survive. The idea behind a decentralized algorithm stablecoin like TerraUSD seems appealing, but it needs a better strategy. Centralized stablecoins like Tether (USDT), which are often criticized for having insufficient reserves, seem helpless in times of crisis.
This week will go down in history as a historic moment in the cryptocurrency industry and will serve as a wake-up call for crypto enthusiasts to understand that there is still much work to be done.
What is a cryptocurrency?
A cryptocurrency is a digital currency or virtual currency which is protected by cryptography, making it nearly impossible to counterfeit or double spend. Many cryptocurrencies are decentralized networks based on Blockchain technology—a distributed ledger enforced by a heterogeneous network of computers. A distinguishing feature of cryptocurrencies is that they are typically not issued by any central authority, making them theoretically immune to government interference or manipulation.
What is the stock market?
Stock market refers in a broad sense to the collection of exchanges and other places where the buying, selling and issuing of shares of publicly traded companies takes place. Such financial activities are conducted through formal institutionalized exchanges (physical or electronic) or through over the counter (OTC) markets that operate under a defined set of regulations.
What are stablecoins?
Stablecoins are cryptocurrencies whose value is anchoredor tied to that of another currency, commodity or financial instrument. Stablecoins aim to provide an alternative to the high volatility of more popular cryptocurrencies, including Bitcoin (BTC), which made such investments less suitable for widespread use in transactions.