What happened to cryptocurrencies?

Posted on May 19, 2022



The cryptocurrency world took a hit last week. Bitcoin price has fallen to levels not seen since 2020; Coinbase, the largest cryptocurrency exchange, experienced a stock crash; and a stablecoin The major called Terra and the associated cryptocurrency Luna collapsed.

In response, cryptocurrency naysayers took to Twitter to dance to Bitcoin’s grave, and subreddits previously filled with celebrations of burgeoning cryptocurrency wallets were quickly overwhelmed with people peddling numbers, suicide hotlines, and desperate personal stories of posted lost fortunes.

Part of the decline in the cryptocurrency market can be explained by the fact that they are now closely following the stock market and that the global factors that have impacted the S&P 500 and the Dow Jones Index have also impacted Bitcoin: another month of high inflation, Rate hikes by the Federal Reserve, slow economic growth and supply chain disruptions due to Russia’s war on Ukraine and political China without Covid.

But it’s impossible to understand what’s going on with Bitcoin without understanding the role of Terra’s collapse and what it might (or might not) say about stablecoins, which are an integral part of the crypto ecosystem.

As her name suggests, the stablecoins are non-volatile digital currencies pegged to the dollar. This anchoring is superficially ” backed by reserves such as dollars, US Treasuries or other traditional assets”reported the New York Times last week. This bond simply means that if you use one US dollar to buy one stablecoin You can expect that on Monday, that on Friday stablecoin can still be exchanged for a dollar. Using stablecoins like USDC (USD Coin) and USDT (Tether) allows investors to get in and out of their cryptocurrency positions faster.

However, a stablecoin popular turned out to be not so stable: Terra, whose Times finds that it was him based on an algorithm that encourages traders to hold its value‘ lost almost all of its value last week after its supporting sister currency Luna fell to 23 cents. (Read more about the technical side of Terra’s collapse here.) Terra’s parity loss meant its holders couldn’t exchange their tokens 1:1 for US dollars, which is the primary function of stable currencies.

The loss of Terra’s Anchor not only wiped out the wealth of its investors, it also created another stablecoin, Tether to briefly lose its peg to the dollar, falling to 94.55 cents before recovering. The incident also caused many investors Bitcoins pull out lest Terra’s collapse be a sign of a systemic problem that could spread to other parts of the crypto space.

Whether the Terra Incident is a harbinger of future collapses depends on who you ask.

said Sam Bankman-Fried, CEO of FTX, a leading crypto exchange tweeted 12th of May:

Really, we shouldn’t use the same word for all of these things. What we call “algorithmic stablecoins” are not actually stable, neither are fiat-backed stablecoins. They are more like structured products and need an edge if they are to justify the risk. »

What worries Jon Stokes, founder of Ars Technica and avid Web3 watcher, is that Terra’s owners have put their all into the project without considering the risk. He entrusts reason :

There was an ecosystem with the Terra Luna pair. It wasn’t just a stablecoin that people were using [les échanges décentralisés] exchange USD; there was an ecosystem of DeFi products… built on top of it. »

Because Terra was more than just a stablecoin,” What imploded is not just an asset, it’s a whole corner of web3‘ says Stokes. Also, Terra and its associated protocol are Anchor ” had some kind of VC imprimatur. “.

Big names and big money were behind Terra, raising the question of whether retail investors can follow the lead of venture capitalists and other institutional investors who can afford bigger losses.

Additionally, Stokes notes that Terra has always met with skepticism, not least because it’s been backed by volatile assets. However, Stokes says he is also skeptical about supposedly safer stablecoins:

There’s a lot of this stuff out there; I suspect that we will see more implosions of this type in the coming weeks and months.. I think Tether is prone to a bank run“.

Another way to see Terra collapsing is a successful stress test of Tether, which quickly regained its 1:1 peg with the US dollar.

That’s what Nic Carter, general partner at Castle Island Ventures and founder of Coin Metrics, took away from the past two weeks, which saw Tether processing over $7 billion in redemptions.

According to him :

If Tether didn’t have reserves, they wouldn’t be able to.. This shows that the mechanism worked as expected“.

He adds that while many crypto critics “ indiscriminately ” and “Consider everything a scam”some things are real Ponzi scheme ” From where ” Ponzi-adjacent“. He adds that Terra meets the requirements.

Why those Bitcoin Following stocks so closely, Carter explains that it’s investors who seek to manage risk in their portfolios during these adverse times:

“Bitcoin is a great asset to liquidate, it sells 24/7, globally, anywhere.”

And finally, we could start talking about stocks following crypto, not the other way around.

Bloomberg Opinion columnist Matt Levine writes:

My opinion is that if crypto prices crash, there will be no contagion in the rest of the financial system. But I think that’s debatable at this point. Crypto has at least started to make its way into the real financial system. Some traditional investors also own cryptocurrencies; If their cryptocurrency crashes, they may have to sell regular securities. Some public companies are exposed to crypto (because they’re crypto exchanges, because they’ve leveraged crypto holdings, etc.), so if crypto goes under, your boring old index fund could go under. »

The existence of ripple effects would in some ways prove crypto’s success, Levine argues.

Despite the current volatility in the crypto space, its fundamental promises hold true.

Carter adds:

It remains a competitor for central banks. I am very clear that bitcoin in particular and then stablecoins are very useful for financial and monetary freedom. »

On the Internet

Translation Justine Colinet for counterpoints

#happened #cryptocurrencies

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