With cryptocurrency trading falling today following the collapse of TerraUSD and the most volatile week for Bitcoin trading in at least two years, the question arises as to why the crash current crypto happened?
Importantly, the wipeout of the algorithmic stablecoin TerraUSD and its sister token Luna knocked over $270 billion out of the total $1 trillion worth of the crypto industry. The weekly net change in Bitcoin volatility was the highest in two years, according to reports.
Luna was by no means the only casualty in a week when cryptocurrencies fell 30%. Although some have recovered to some degree, it still represents a total loss of more than US$500m (£410m) over seven days, raising existential questions about the future of the market.
What triggered the current cryptocurrency crash:
Interestingly, the current crash may have been triggered by a financial “attack” on the stablecoin Terra (UST), which is supposed to match the US dollar but is currently trading at just 18 cents and its partner coin, Luna, is falling. then collapsed.
Such an attack is extremely complex and involves placing several transactions in the crypto market with the aim of triggering certain effects, which can provide the “attacker” with significant gains.
In this case, these exchanges caused Terra to fall, which also caused its partner piece Luna to fall. Once this was noticed, it caused panic, which in turn triggered market pullbacks, which then caused further panic. Some (but not all) stablecoins rely heavily on perception and trust – and once that is shaken, big drops can kick in, according to the report by news agency PTI.
Additionally, the recent major falls in cryptocurrencies have called into question the stability of stablecoins. This is relevant as they are designed to have virtually zero volatility by maintaining a “peg” to another underlying asset.
The effects seen this week have spread throughout the crypto space. Even leading stablecoin Tether has lost its peg, at 95 cents on the dollar, perhaps demonstrating the need for regulation.
Where is the secure crypto space?
It is important to note at this point that investor reaction will be key to the future of cryptocurrencies. With panic and despair over comparisons of this crash to a traditional run on the banks, investors could be doing more harm than good. A more accurate comparison is with stock market crashes where investors fear that the stocks and shares they hold will soon be worthless. And so far, the reaction to this crypto crash suggests that a large portion of crypto holders view their investments the same way.
Many invest in cryptocurrencies because they thought it would make them richer. This belief has undoubtedly been shaken. But another motivation for investing in cryptocurrencies may be the belief in their transformational nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchange.
For many investors, however, any increase in the value of a cryptocurrency is a demonstration of the growing power of cryptocurrency over traditional money. But likewise, a significant drop in the value of crypto isn’t just a monetary loss – it’s an ideological loss.
(With agency contributions)