With cryptocurrencies trading lower in the aftermath of TerraUSD’s collapse and the most tumultuous week for Bitcoin trading in at least two years, the question that has been raised is why did the recent cryptocurrency slump occur?
It is worth noting that the annihilation of algorithmic stablecoin TerraUSD and its sister token Luna diminished the crypto sector’s overall trillion-dollar value by more than $270 billion. According to various reports, Bitcoin’s weekly net change was at its greatest level in two years.
Luna was far from the lone loser in a week when cryptocurrencies were down 30%. While some have recovered to some extent, the market has lost more than $500 million (£410 million) in seven days, prompting existential questions about the market’s existence.
What triggered the latest cryptocurrency slump?
Interestingly, the recent crisis may have been precipitated by a financial “attack” on the stablecoin Terra (UST), which is meant to mirror the US dollar but is currently trading at only 18 cents, and its companion coin, Luna, which has since crashed.
Such an assault is incredibly sophisticated, including several trades in the cryptocurrency market in an attempt to trigger particular consequences — which might result in substantial winnings for the “attacker.”
In this scenario, the transactions led Terra to plummet, which prompted its companion currency, Luna, to decline as well. When this was discovered, it produced fear, which sparked market withdrawals, which sparked even more panic. According to news agency PTI, some (but not all) stablecoins rely heavily on perception and confidence — and when this is undermined, huge drops might occur.
Furthermore, the recent significant drops in cryptocurrency prices have called into doubt the stability of stablecoins. This is significant since they are meant to have almost little volatility by remaining “pegged” to another underlying asset.
The consequences experienced this week have spread throughout the crypto ecosystem. Even Tether, the top stablecoin, lost its peg, falling to 95 cents on the dollar, highlighting the necessity for regulation.
Where is the cryptocurrency safe haven?
It is worth noting at this time that how investors react will be critical to the future of cryptocurrencies. Investors may be doing more damage than good by spreading panic and sorrow as a result of parallels to a traditional bank run. A more true analogy would be stock market collapses, in which investors fear that the stocks and shares they own would soon be worthless. So far, the reaction to the crypto meltdown indicates that a sizable portion of crypto investors see their investments in a similar light.
Many people invested in cryptocurrency because they thought it would make them affluent. This conviction has undoubtedly been shaken. However, another reason for investing in cryptocurrencies might be a confidence in their transformative character, or the notion that cryptocurrencies will eventually replace traditional modes of financial exchange.