The past seven days have been brutal for the entire cryptocurrency sector. According to CoinGecko, the valuation of the entire crypto market is currently at $1.278 trillion at the time of writing, which is $578 billion lower than last Wednesday, marking a 30% drop across the crypto board.
The two largest cryptocurrencies by market value — Bitcoin (BTC) and Ethereum (ETH) — have not been immune to the market fallout. This morning, CoinMarketCap showed that Bitcoin fell to $26,350.49. You’d have to go back to December 2020 to see BTC at that level. It’s a similar story for Ethereum, which crashed through the psychological threshold of $2,000 earlier today, down to $1,748.30, marking its worst price position since March 2021.
Analysts are citing various causes for this crypto collapse including higher-than-expected inflation numbers this week and the Federal Reserve’s half percent interest rate increase last week. However, the most significant contributor has to be the contagion caused by the ongoing flameout engulfing the supposed stablecoin TerraUSD (UST) and its sister cryptocurrency Terra (LUNA).
The Terra stablecoin contagion
Both UST and LUNA were created by Terraform Labs, with UST designed to be a stablecoin pegged to the value of the U.S. dollar. As an algorithmic stablecoin, UST relies on its software to automatically adjust both its supply and LUNA’s to correctly calibrate the UST price to the dollar peg on a continuous basis. However, a series of unexplained events over the past few days overwhelmed the UST failsafes — dragging down LUNA and the rest of the crypto space as well
“There is a lot of uncertainty around LUNA right now — the project is really ambitious and the objective an admirable one but just what the effect on the LUNA token itself will be is unclear,” Director and lecturer at the Swinburne University of Technology, Dimitrios Salampasis said in an email statement received this morning. “Algorithmic stablecoins are considered as being inherently fragile and are not stable at all. In my opinion LUNA will exist in a state of perpetual vulnerability.”
Yesterday, the cofounder of Terraform Labs and its developers outlined a drastic recovery plan with several parts including removing a large number of UST from circulation, while minting millions more of LUNA coins, as well as securing more collateral as a depository backstop. It’ll be a while before we know if those measures are enough to repair the valuation damage to both UST and LUNA.
However, the reputational damage sustained by the entire cryptocurrency asset class in the form of fear, uncertainty, and doubt is likely to endure well into the future.
Bitcoin price falls to 16-month low in latest crypto crash
The price of bitcoin (BTC-USD) has tanked to a new 16-month low as a cryptocurrency sell-off extends amid a wider downturn in global equities and other assets such as oil.
The latest crypto crash saw the world’s largest token wipe out all of its 2021 gains after plummeting as much as 11.5% to $27,400 (£22,490) in early trade on Thursday morning in London.
In the last 24 hours, the market value of the token, which accounts for nearly a third of the $1.8tn cryptocurrency market, decline 11% to $528bn, according to CoinMarketCap.
Last week, bitcoin fell 50% from its $69,000 November 2021 high as global economic and geopolitical headwinds knocked the cryptoasset.
The sell off wiped 15.4% of the entire crypto market, meaning it has now lost more than 50% of its value over the last six months as a market-wide downturn erased over $1.5tn from the market.
Ether (ETH-USD), the second largest crypto, which underpins the Ethereum network, was hardest hits in the market wipeout after losing over 20% over the last 24 hours. It crashed 27.3% to $1,890 at the time of writing.
It comes after stablecoin TerraUSD (LUNA1-USD) decoupled from the dollar, triggering a stampede out of popular tokens after falling more than 99%.
The token is ranked among the top 10 most valuable cryptocurrencies in the world. The fall led to Binance temporarily suspending withdrawals on the coin at one point, preventing users to sell.
Meanwhile, the world’s largest stablecoin, tether (USDT-USD), broke the $1 peg, down 1.8% to $0.98. The $80bn stablecoin is designed to track the value of the US dollar one-for-one.
Stablecoins are a class of cryptocurrencies that attempt to peg their market value to some external reference such as the US dollar or a commodity’s price like gold to offer price stability.
“Bitcoin and the crypto markets have capitulated as Bitcoin has reached levels not seen since December 2020. LUNA is now below $0.05 as UST has failed to restore its peg,” said Marcus Sotiriou, Analyst at the UK based digital asset broker at GlobalBlock. “It is clear that confidence in the protocol has been lost, and now LUNA is mainly being used as exit liquidity for UST holders. In addition, they have built up a significant amount of bad debt.”
Experts say the crash is a “tough pill to swallow” for first-time crypto investors and reinforces the crypto markets “Wild West reputation”.
“The crypto sell off has been driven by a culmination of long and short term factors including worries about regulation, security breaches as well as pressures buffeting traditional markets such as geopolitical uncertainty and US interest rate hikes,” said Myron Jobson, senior personal finance analyst at interactive investor.
Research from Interactive Investor found that 45% of young adults aged between 18 and 29 have made crypto their first investment of choice, with a large number funding this through a cocktail of credit cards, student loan, and other loans.
The crash also follows a bleak first-quarter earnings report from Coinbase (COIN). The company warned of a significant drop in the usage of its centralised exchange during the time period. It had 9.2 million monthly transacting users in the first quarter of this year, compared with 11.4 million in the three months to December 2021.
In the first quarter ending March 2022, the centralised cryptocurrency exchange had 2.2 million fewer users than the previous quarter ending December 2021.
Shares in the crypto platform lost 26.4% on Wednesday night, and were down 7.5% in pre-market trading on Thursday.
The company, the largest cryptocurrency exchange in the US, was valued at nearly $86bn after its blockbuster listing on the Nasdaq (NDAQ) in April last year.
However, Coinbase’s stock has lost more than 70% of its value since late March as a broader slide in tech stocks and the latest bout of crypto declines puts the company’s future on the line. Shares closed at $328.28 after its first day of trading on 14 April, now trading at 50.04 on Thursday in pre-market trade.