Cryptocurrencies Updates: You might have been quietly convinced a month ago that your £100 (US$122) investment in the cryptocurrency Luna was a wise decision. However, Luna’s worth has subsequently plummeted; at the time of writing, that £100 is only worth roughly 4p (5p).
Luna was far from the only cryptocurrency to suffer a 30% drop in a week. Although some have recovered to some level, the market has lost almost US$500 million (£410 million) in seven days, raising existential issues about the market’s sustainability.A financial “attack” on the stablecoin Terra (UST), which is designed to mirror the US dollar but is currently trading at only 18 cents, could have precipitated this crash. Luna, the coin with which it was paired, afterwards crashed.
This type of attack is incredibly complicated, and it entails making many trades in the crypto market in order to trigger specific effects – which might result in big profits for the “attacker.”Terra fell as a result of these deals, and Luna, its companion coin, fell as well.
When this was uncovered, panic ensued, leading to market withdrawals, which caused even more concern. Some stablecoins (but not all) rely heavily on perception and confidence, and when these are shattered, huge drops can occur.
Crucially, the recent large dips in cryptocurrency prices have cast doubt on the stability of stablecoins. After all, by retaining a “peg” to another underlying asset, they are supposed to have nearly zero volatility.
However, the repercussions observed this week spread across the whole crypto ecosystem, resulting in singleday losses comparable to – if not worse than – a “Black Speculators induced a collapse in the value of the pound on Wednesday in 1992.” Even Tether, the most popular stablecoin, lost its peg, falling to 95 cents on the dollar, highlighting the need for regulation. Because where is crypto’s safe haven if stablecoins aren’t stable?
The reaction of investors will determine the future of cryptocurrencies. Some have compared this crisis to a typical bank run. Customers are more concerned about their bank’s ability to give them their money during a bank run than they are about their money becoming worthless.
Stock market collapses are a better analogue, as investors are anxious that their stocks and shares may soon be worthless. And, based on the response to the crypto meltdown thus far, it appears that a sizable portion of crypto investors share this viewpoint.