The Crypto Crash was trending on Twitter, and all Bitcoin investors felt it. So here we will tell you what happened and why you should be aware that stable coins like $UST and the related token, $LUNA, are not as stable as they claim.
Why did Bitcoin's Price drop?
Bitcoin price crashed and is touching a bottom of $30,000. This value represents a 25% loss last month, which was unexpected for the cryptocurrency with the highest market capitalization. Also, the rest of the cryptos were not immune to this drop: the total crypto market cap ended up with a valuation of about $1.5 trillion against $3 trillion at its peak.
There are several clues as to why this tanking occurred. Firstly, the latest inflation data in the United States showed that the consumer price index continues to rise. On the other hand, the war between Russia and Ukraine has no clear direction, and the sanctions imposed involve the entire EU. This uncertainty results in a tendency for investors to move away from risk and dump volatile assets (like cryptos).
In addition, the correlation of Bitcoin with the Nasdaq, the stock index of American technology companies, is at its all-time high. For two months, Bitcoin moved with the same percentage values. If you start talking about a bearish market, it is tough to predict what will happen to cryptocurrencies. The violins of the Titanic are not playing yet, but we must be alert to what happens in the coming months with the major cryptos.
The Unimaginable Tumble of Luna and UST
Luna's token fell from its peak of $118 last month to just a fraction of a cent. We hope that this information reaches you as news and you have not lost everything by being one of its investors. So what was it that happened?
Terra (LUNA) and TerraUSD (UST) are two native tokens from the Terraform Labs ecosystem, an alternative to the Ethereum ecosystem. UST was an algorithmic stablecoin, it sought to maintain the parity with the dollar one to one, but instead of doing it with cash reserves and other investments to keep the price of the asset stable, it did so through complicated coding. To mint UST and maintain its parity with the USD, LUNA's equivalent missing amount in USD was burnt and vice versa.
As its price fell, the entire ecosystem collapsed.
To add more instability to this already explosive cocktail, Do Kwon, the CEO of Terraform Labs, decided to back the coin with a percentage in Bitcoin a few months ago.
This resounding failure resulted in a 99% drop in value in days. The leading trading platforms have already withdrawn it from their market. Discord itself closed channels on the subject. Although Do Kwon asked for support through Twitter to stabilize the UST again, the losses are unrecoverable.
This move against stablecoins is a bad sign for the entire crypto market as Terra USD was the third-largest stablecoin by market value. Furthermore, like a domino effect, the fall of LUNA dragged down other stablecoins such as USDT, which, for the first time, stopped being in a 1:1 relationship against the dollar.
A brief review: by stablecoins, we mean cryptocurrencies whose value is linked to another fiat currency, commodity or financial instrument. The most popular are Tether (USDT), Coinbase's USDC (USDC) and TrueUSD (TUSD), and they are used to:
trade other cryptos paying less commission than exchanging them for fiat USD
store them as savings
Domino effect on other cryptocurrencies
With Bitcoin's stagnation and the fall of the stablecoin UST, investors have rushed (and rightly so) to shelter their savings.
When every financial market falls, investors prefer to get rid of the most volatile assets. No matter how much risk tolerance one has, you should seek to take care of your savings.
For intraday traders, other equally volatile markets such as Forex or commodities are in a stage of a great movement. And these are liquid markets with constant demand. Its regulation provides greater security than crypto and a similar profit percentage when traded wisely.
The movements of the last few months, in short, should serve as a wake-up call for CryptoBros, who must understand that, as in other markets, risks always exist.
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