Why are cryptocurrencies freezing and what should you do?

  • Sharp falls in cryptocurrency prices are a reaction to economic trends such as rising inflation and the Fed’s attempt to control it.
  • Meanwhile, Coinbase, the largest cryptocurrency trading platform, has announced net losses of $ 340 million and a decrease of 2.2 million monthly users.
  • TerraUSD or Luna is unlikely to recover.

The cryptocurrency world has had a tough May so far.

Since the beginning of the month, the cryptocurrency has lost $ 600 billion in value. Bitcoin has fallen at prices not seen since 2020, briefly dipping as low as $ 26,000, although prices are currently around $ 30,000 as of today.

To some extent, the fluctuation in the price of cryptocurrencies is a reaction to broader economic trends, such as rising inflation and the Fed’s attempt to control it. “These are having an impact on traditional capital markets, but you are also seeing that they have an impact on cryptocurrency,” says Gabriella Kusz, director of the board of the Global Digital Asset and Cryptocurrency Association.

While it is true that we are seeing similar price drops across the market, they are not as drastic as the current one


volatility

that cryptocurrency is seeing. So what else is at stake here?

Why does encryption crash?

A significant part of the cryptocurrency’s value lies in its perception of the market, which plummeted as investors began to lose faith in cryptocurrency as an asset.

While cryptocurrencies like bitcoin and ethereum are considered volatile investments, stablecoins should be the exact opposite. These coins are usually pegged to an underlying asset that guarantees their price stability, usually held at $ 1.

There are two types of stablecoins: algorithmic and collateralized. While backed stablecoins are backed by a fiat currency, algorithmic stablecoins “are instead anchored to the value of other digital assets via smart contracts,” says Simon Furlong, co-founder of Geode Finance.

TerraUSD, also known as UST, is (or was) an algorithmic stablecoin that contained a constant value of $ 1. TerraUSD is backed by another cryptocurrency called Luna, which is based on a blockchain called Terra. On May 9, TerraUSD plummeted and its value plummeted as the initial destabilization triggered a maximum exodus. Currently, UST is around 20 cents. This also caused Luna’s value to drop to $ 0 as its main use case, TerraUSD support, was now out of date.

Tether, another stablecoin with the largest market cap, has also temporarily dropped from its peg, albeit much less drastically, from $ 1 to $ 0.95 cents, which is significant for a collateralized stablecoin that, like the name suggests, he should be adamant.

To make matters worse, while this was happening, Coinbase, the largest cryptocurrency exchange, released its first quarter earnings report, which revealed a net loss of $ 340 million and a decline in monthly users of 11.4 million. to 9.2 million.

Coinbase’s report also revealed the lack of bankruptcy protections for its users. This means that if the company goes bankrupt, Coinbase users lose their accounts and the coins they hold in those accounts. Coinbase CEO Brian Armstrong took to Twitter to allay fears that the platform would go bankrupt.

While these coins are not explicitly linked to cryptocurrencies such as bitcoin or ethereum, the incident had a major impact on the level of trust investors place in cryptocurrencies. “Billions of dollars have been wiped out of people’s balance sheets and uncertainty about these tokens has spilled over into the broader cryptocurrency markets,” says Furlong.

What happens now?

As the value of UST and Luna began to rise, an organization called Luna Foundation Guard, founded by Luna founder Do Kwon, attempted to stabilize the coin by liquidating huge amounts of bitcoin they held in reserve – they had over $ 3 billion worth of bitcoins.

Even if the LFG manages to reset UST to $ 1, which is very unlikely, confidence in Luna is practically nonexistent. “Many people have lost money in this LUNA + UST event and there is no reason to believe this won’t happen again with this project in the future,” says Furlong. This distrust extends to other cryptocurrencies, which will only recover their value as soon as they can regain investor confidence.

While current market conditions may be less favorable for new stablecoins, Kusz says cryptocurrencies need more self-government, particularly with regards to coins that can be considered stablecoins. “If you are unable to maintain price stability during times of high volatility, then you are not, by definition, stable,” he says.

What does the cryptocurrency crash mean for your investments?

Most investment advisors will advise you to have a diversified portfolio, which means that you have investments in a wide variety of sectors and asset types with different ranges of risk and volatility. Adding a cryptocurrency component to your investment portfolio has always been synonymous with adding volatility. To some extent, the events that caused this price fluctuation support this hypothesis.

This incident also serves to highlight that while cryptocurrencies can differ significantly in their communities, cryptocurrencies are often bundled together when an incident like this occurs.

“Not all cryptocurrencies are created equal,” says Rob Chang, CEO of Gryphon Digital Mining. “A thorough understanding of the mechanics and fundamentals of a particular cryptocurrency is very important to avoid these problems.”

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