{"id":124643,"date":"2022-05-18T14:53:16","date_gmt":"2022-05-18T18:53:16","guid":{"rendered":"https:\/\/rbach.net\/?p=124643"},"modified":"2022-05-18T15:32:27","modified_gmt":"2022-05-18T19:32:27","slug":"cryptocurrency-implosion","status":"publish","type":"post","link":"https:\/\/rbach.net\/index.php\/cryptocurrency-implosion\/","title":{"rendered":"Cryptocurrency Implosion"},"content":{"rendered":"\r\n

\"Cryptocurrency<\/a>The cryptocurrency world was rocked last week. The cryptocurrency market lost $500 Billion<\/strong> (Yes with a B<\/em>). The popular cryptocurrency Terra Luna lost 99% of its value<\/strong>, dragging down a so-called “stablecoin<\/a>” with it. The \u201cstablecoin\u201d cryptocurrency<\/strong> TerraUSD, (UST<\/a>) fell from a high of $118.00 (in April 2022), to $0.09 on Thursday (05\/12\/2022).

\"maintained<\/a>TerraUSD is an algorithmic stablecoin<\/a><\/strong> developed by Terraform Labs<\/a> out of Singapore. An algorithmic stablecoin means it does not have reserves (fiat currencies or other highly liquid assets<\/em>). Instead, its value was supposed to be maintained by a complex mechanism. Its value comes from swapping TerraUSD coins with a free-floating cryptocurrency called Luna<\/a> to control supply.<\/p>\r\n

What is a stablecoin<\/h3>\r\n

The goal of a stablecoin is to offer investors a safe harbor to avoid the fluctuations<\/strong> in other cryptocurrencies like Bitcoin and Ether. They are supposed to hold a constant value, no matter market conditions. Recently, stablecoins have\u00a0 been used in international trade and as a way to avoid capital controls<\/strong>, according<\/a> to experts. The theory behind stablecoins is try to ensure they remain in parity (peg) with certain assets<\/strong>. The assets can be the U.S. dollar<\/strong> – with one token equaling $1, for example. However that did not work for<\/a> TerraUSD (UST),

\"stablecoins<\/a>The core theory to maintain its peg is as old as the dismal science. They create supply and demand<\/strong>. Whenever the price of UST falls below $1, traders are incentivized to \u201cburn\u201d their UST tokens\u2014taking them out of circulation\u2014in exchange for Luna. The lower supply of UST, in theory<\/a>, increases the stablecoin\u2019s price back to $1 and maintains the peg. UST was also partly collateralized by billions of dollars\u2019 worth of bitcoin (not highly liquid).

The “algorithmic stablecoin” tanked the broader cryptocurrency market when it fell well below its theoretically fixed peg of 1 to 1 to the U.S. dollar. After losing its peg, UST traded as low as 13 cents on Friday. Luna, its sister cryptocurrency, became nearly worthless overnight after trading for $80 a week earlier. As investors saw the stablecoin dropping, they rushed to withdraw their money (an online bank run<\/a><\/em>). Major crypto exchanges ultimately delisted both Luna and UST to protect consumers.

\"The<\/a>The collapse sent a tsunami thru the cryptocurrency markets and spooked investors. Bank of America Research says<\/a> it was the worst implosion since May 2021. It measures up to both the 2008 financial crisis and the dotcom crash in 2000. The entire cryptocurrency market now has a market capitalization of less than half<\/a> of the $2.9 trillion it was worth in November 2021.<\/p>\r\n

Bitcoin<\/a>, which makes up around 44% of the crypto market, price dropped to a 90-day low of $26,350 per bitcoin. As UST fell BTC lost more than 56% from its November high of $68,990.90.<\/p>\r\n

\"Coinbase<\/a>Coinbase<\/a> (COIN)<\/a>, the only major publicly traded cryptocurrency exchange<\/a>, also fanned the fire. In midst of the cryptocurrency implosion, COIN warned customers that their cryptocurrency holdings could be at risk if Coinbase goes bankrupt. CEO Brian Armstrong said Coinbase issued the warning in order to comply with updated SEC guidance.

Ethereum<\/a> (ETH<\/a>), the second-largest cryptocurrency, dropped to a third from a November 2021 high of $4,812.09 to $1,748.30 during the UST meltdown.<\/p>\r\n

Smaller cryptocurrencies were not immune to the cryptocurerncy implosion.<\/p>\r\n