If a few days ago the alarms sounded when bitcoin fell below 34,000 dollars , things have become even more dangerous for investors now that the currency has fallen below 27,000. It has not been at these levels since December 2020, and the forecast is not good. Almost all existing cryptocurrencies are falling significantly (in the last 24 hours, bitcoin 12.5% but Ethereum almost 21%, for example). The main factor in this new crash, experts say, is in some stablecoins that should be kept stable by design. They have not done it.
Staggering losses . The loss in value from the highs we saw late last year are staggering: bitcoin and ethereum are down 60% from those record highs they reached in November 2021, but things are much worse for other cryptos: Cardano, Litecoin, Shiba, or Doge lose between 85 and 90% of what they used to be worth. In the case of LUNA, the currency of Terra, the loss is 99%.
The fall, beware, is not exclusive to cryptocurrencies: a similar message could be given from the global economy if we take a look at the big technology companies, whose shares on the stock market have also lost a lot of ground since reaching all-time highs a few months ago. They commented on it on Reddit, where someone mentioned powerful examples : Nvidia and Facebook have fallen by 50%, but they are among the least: Netflix and Shopify by 80%, and of course Robinhood and Coinbase, closely linked to cryptos, have still fallen more, 90% from its historical maximums.
What is a stablecoin . These cryptocurrencies have the particularity that they are designed to minimize the price volatility of traditional cryptocurrencies, and are associated with a “stable” asset that can be another stable cryptocurrency or fiat money (such as the dollar or the euro).
There is a special type of stablecoins, called seigniorage-style stablecoins that are not backed by another crypto or fiat currency: their value is managed by an algorithm that controls the money supply in that cryptocurrency. It is essentially the same thing a central bank does when printing or destroying currency.
TerraUSD stablecoin implosion . The TerraUSD (UST) cryptocurrency has done something that a stablecoin should not do: its price has remained pegged to the dollar in a 1:1 ratio since its inception. The oscillations have been -as with other stablecoins, that's why they are called “stable”- minimal, but recent economic events -rising interest rates in the US, falls in stock prices- have caused a sudden collapse in its value, which instead of being $1, it was $0.29 according to CoinMarketCap .
Why has that happened? UST was not backed by dollars, but it theoretically maintained its link to that fiat currency through its connection to another cryptocurrency called LUNA, which is the Terra network token. On April 5, everything was going great for LUNA, which reached its all-time high of $116. The fall of the markets —stock and cryptocurrency— caused a massive sale of these tokens, which have ended up losing 99% of their value. Right now it's worth $0.26.
Inflation does not give respite . The new drop has a lot to do with the latest news about the state of inflation in the US. It has slightly decreased in April, but it is still the highest in the last four decades. The prices of products and services do not stop rising and the impact of the Ukraine War only aggravates the problem.