Unsettled Calm Returns After Crypto’s $270 Billion ‘Death Spiral’

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Crypto’s $270 Billion Collapse Gives Way To An Uneasy Calm

Even by the standards of the cryptocurrency universe, it was an outstanding week.

An algorithmic stablecoin called TerraUSD crashed from its dollar peg when the complex mechanism designed to secure the bond suddenly backfired, sucking even the biggest digital assets into a vortex of panic selling. Terms like “death spiral” have entered the vernacular.

Mid-week turmoil briefly dragged down the $80 billion stablecoin Tether – a market giant and a key cog in many transactions – prompting its issuer to reassure investors that all is well. Crypto-related exchange-traded products were also hammered, with one following the struggling Luna token dropping 99% in a single day.

On Friday, a semblance of calm had returned to the crypto markets. But the tally was still high, with some $270 billion in cryptoasset 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 crash and cause a market meltdown like this?

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“The ramifications for space and what we’ve learned post-mortem are important and vital lessons as we move forward,” wrote Mati Greenspan, founder of crypto research firm Quantum Economics, in a published newsletter. Thursday evening.

Despite surging 8.5% on Friday, Bitcoin is still down 13% over the past five days, while the second token Ether is down 20%. So-called smaller altcoins took even bigger hits. Luna, the token that was supposed to help TerraUSD maintain its peg, lost almost all of its value.

Yet despite the tough week, many cryptos posted big jumps at the end of the week, rallying to a 2.6% lead in the S&P 500 and a nearly 4% gain in the Nasdaq 100. Solana, Cardano and Avalanche each added at least 17% on Friday, Bloomberg data shows.

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 made the decision to “come up with a plan to reconstitute” the Terra network.

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“We were shocked to see such a huge platform like Terra shut down. This is unprecedented,” said Mihir Gandhi, partner at PwC and head of its payments transformation business in India. world of stablecoins seems worrying.”

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More traditional stablecoins like Tether, USDC and Binance USD – which hold dollar equivalents and other reserves to back their pegs – were trading at par with the greenback on Friday, suggesting that the collapse of the UST has yet to erode trust in these tokens. Still, regulators have taken note of the episode and are pledging to step up oversight.

Cryptocurrencies face other challenges, including their tendency to trade more and more like tech stocks. Bitcoin’s 40-day correlation to the Nasdaq 100 index currently stands at 0.82, near a record high, according to data compiled by Bloomberg. A correlation of 1 indicates that two assets are trading in perfect unison; a reading of -1 means they are trading oppositely.

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The closer link to equities has undermined the argument that cryptoassets are a good way to diversify in times of stress. Instead, they are being dropped along with other asset classes in an environment of monetary policy tightening.

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Federal Reserve Chairman Jerome Powell reiterated Thursday that the central bank will likely raise interest rates by half a percentage point at each of its next two meetings, and may possibly go further. Powell, who is trying to tame the fastest inflation in four decades, acknowledged in an interview with the public radio show Marketplace that the Fed should have acted sooner.

Edward Moya, senior market analyst at Oanda, said in an email late Thursday that Bitcoin’s drop below $30,000 had created a “key entry point for many institutional investors.”

“Confidence has declined in the cryptoverse, but it looks like we are nearing the end of the market sell-off,” he added. “Bitcoin rebounded from $25,424, but that won’t last unless risk appetite stabilizes soon.”

–With help from Emily Nicolle, Suvashree Ghosh, Tanzeel Akhtar, Akshay Chinchalkar and Vildana Hajric.

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