Last week was a very bleak one for the cryptocurrency markets with a number of major coins suffering huge loses, denting investors’ faith as Bitcoin fell to the lowest price in more than a year.
The downward trend was sparked in part by the collapse of Luna and TerraUSD. They are known as ‘stablecoins’ in crypto circles, meaning that they are supposed to be free from the volatile price changes that has hampered the uptake of cryptocurrencies so far.
The value of both Luna and TerraUSD is tied to the US dollar, meaning that each coin is supposed to be worth $1. When their market price moves too far from that figure there is a mechanism in place which balances it out, and is supposed to keep the price stable.
What is a stablecoin?
Stablecoins can be seen as a bridge between the world of cryptocurrency and the traditional fiat currency we use every day. They are pegged to a reserve asset, such as the dollar or gold, to prevent wild price fluctuations.
If you are hoping to make payments or carry out transactions using a cryptocurrency you need a coin with a stable value. Coins like Bitcoin and Ether can lose and gain value rapidly, which creates huge uncertainty for both the buyer and the seller.
My latest article is a post-mortem of the Terra/Luna crash:https://t.co/megEG67sOC pic.twitter.com/DGK1g8d0S4
— Lyn Alden (@LynAldenContact) May 15, 2022As well as being a less volatile currency, the blockchain technology underpinning both Luna and TerraUSD makes money transfers and international transactions easier and cheaper. Coinbase recounts people transferring millions of dollars of stable coins like USD Coin (USDC) for a fee of less than a dollar.
Another feature shared by both Luna and TerraUSD, along with several other stablecoins, is the tempting interest rates for savings. Previously both coins had been linked with the Anchor protocol which allowed holders to earn interest at 20%. Anchor has now dropped this fixed rate for an adjustable one, and it remains to be seen if the flexible rate will be as generous.
Luna and TerrUSD collapse sparks crypto-panic
The rapid devaluation of two supposed ‘stable’ coins hit the crypto markets hard and there has been a significant loss of confidence in the past week. Last week Bitcoin recorded an 8% drop in value in a single day; while Ripple (19%) and Ether (14%) also suffered significant falls.
Edward Moya, senior market analyst at Oanda, explains that even coins as popular as Bitcoin have felt the consequences of the Luna and TerraUSD decline.
“Bitcoin has been a casualty of the broader market selloff of risky assets, but the latest crisis with stablecoins triggered the collapse of the $30,000 level, which was a key entry point for many institutional investors,” Moya said.
Bitcoin suffered. Ethereum suffered. Following the Terra crash, cryptocurrencies lost more than $200bn in less than 24 hours. Many retail investors lost all their savings. pic.twitter.com/iMcqoXyvH1
— The New Statesman (@NewStatesman) May 19, 2022The sell-offs last Thursday had a huge effect on the crypto market as a whole, with close to $1 trillion wiped of its value across the past month. Undoubtedly part of the cause has been a need to rebalance the almost unchecked growth of the previous 18 months, but the collapse of two stablecoins provided the spark that burnt countless investors last week.
