Crypto Crash: What Investors Need to Know
WikiBit 2022-08-13 13:08Bitcoin's value has dropped by more than half from its peak in November 2021, causing the whole cryptocurrency industry to collapse. Investors may be concerned after seeing such severe drops in Terra (LUNA) and TerraUSD (UST). Who would have predicted such a precipitous drop when both cryptocurrencies were in their honeymoon phase a month ago? Because of the negative mood that propagated throughout the crypto market, investors withdrew their funds, forcing Tether (USDT) to lose its peg to the dollar. The week not only taught investors to be cautious while investing, but it also dispelled numerous misunderstandings about the bitcoin market.
Bitcoin May Not Be the Best Hedge Against Inflation
For the past few months, the cryptocurrency market has been advancing in lockstep with the stock market. In March 2022, the correlation between Bitcoin and the S&P 500 reached a high of 17 months, suggesting that the crypto and stock markets are moving in the same direction.
Bitcoin is frequently regarded as a useful inflation hedge. This means that the top cryptocurrency is unaffected by inflation. It may not always be true; at least, that is what the market witnessed this week. High inflation and tighter monetary policy also impacted crypto investors, resulting in the market's collapse. These developments demonstrate that cryptocurrency has a larger market and is becoming more mainstream.
Stablecoins Aren't Always Stable
Stablecoins are supposed to hold their value over time. They are backed by fiat currencies such as the United States dollar, gold, and even other cryptocurrencies. The demise of Bitcoin had a negative impact on Terra and TerraUSD. Terra's operation is to blame for this.
Terra (LUNA) and TerraUSD (UST) are the Terra network's native tokens. TerraUSD intends to use algorithms to keep its peg to the US dollar. To mint UST, one must first burn the dollar-equivalent number of LUNA. It also works the other way around. That is how the protocol keeps the UST price stable.
According to TechCrunch.com, Terra's inventor, the Luna Foundation Guard (LFG), plans to add Bitcoin to its reserve in March 2022 to offer extra cushion to its stablecoin. If something went wrong with the prices, the Bitcoin backing would help to stabilize UST. Unfortunately, that did not happen, and the stock market, Bitcoin, and the entire crypto industry crashed.
According to coingecko.com, Terra (LUNA) is presently trading at $0.000000999967 per token, a 14.359% drop from its all-time high of $119.18 in April 2022. According to coingecko.com, TerraUSD (UST), which has lost its dollar peg, is presently trading at $0.13.
The massacre spread to other stablecoins, including Tether (USDT), the largest stablecoin, which lost its dollar peg. On May 12, the price of UST dropped to an all-time low of $0.6841. This means that USDT holders have tokens worth less than $1. However, according to coingecko.com, the cryptocurrency is currently back on track, trading at $1.
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