Crypto Crash: What Investors Need to Know

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Crypto Crash: What Investors Need to Know

Bitcoin’s value has dropped by more than half from its high 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 across 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.

Key Takeaways

  • The crypto markets are in disarray, having lost $600 billion in a single week.
  • Bitcoin fell below $30,000 for the first time since July 2021, accounting for less than half of its November 2021 high.
  • TerraUSD and Terra have fallen the most, now trading below $1.

Bitcoin May Not Be the Best Hedge Against Inflation

For the last several 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 heading in the same direction.

Bitcoin is often seen as a useful inflation hedge. This implies that the top cryptocurrency is unaffected by inflation. It may not always be true; at least, that is what the market observed this week. High inflation and stricter monetary policy also impacted crypto investors, culminating in the market’s collapse. These developments demonstrate that cryptocurrency has a larger market and is becoming more popular.

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Stablecoins Aren’t Always Stable

Stablecoins are meant to hold their value over time. They are backed by fiat currencies like 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 coins. TerraUSD intends to use algorithms to keep its peg to the US dollar. To manufacture UST, one must first burn the dollar-equivalent number of LUNA. It also works the opposite 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 anything went wrong with the pricing, the Bitcoin backing would assist to stabilize UST. Unfortunately, it did not happen, and the stock market, Bitcoin, and the whole 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 expanded to other stablecoins, including Tether (USDT), the biggest stablecoin, which lost its dollar peg. On May 12, the price of UST dropped to an all-time low of $0.6841. This implies that USDT holders have tokens worth less than $1. However, according to coingecko.com, the cryptocurrency is presently back on track, trading at $1.

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The Bottom Line

This week’s crypto meltdown provided several lessons. Even the most popular cryptocurrencies, like as Terra, may experience overnight losses and struggle to stay afloat. The concept of decentralized algorithm stablecoins like TerraUSD is intriguing, but it need a stronger method. In times of crises, centralized stablecoins like Tether (USDT), which are often chastised for having inadequate currency reserves, seem powerless.

This week will be remembered as a watershed event in the crypto sector, serving as a wake-up call for crypto fans who need to realize that there is still a lot of work to be done.

What is a cryptocurrency?

A cryptocurrency is a digital or virtual money that is protected by encryption, making counterfeiting or double-spending practically impossible. Many cryptocurrencies are decentralized networks based on blockchain technology—distributed ledgers that are reinforced by a diverse network of computers. The fact that cryptocurrencies are often not issued by any central body makes them potentially impervious to political meddling or manipulation.

What is the stock market?

The stock market refers to the collection of exchanges and other places where shares of publicly traded firms are bought, sold, and issued. Such financial transactions are carried out via established official exchanges (whether physical or electronic) or through over-the-counter (OTC)marketplaces that follow a set of rules.

What are stablecoins?

Stablecoins are cryptocurrencies whose value is fixed or linked to another money, commodity, or financial instrument. Stablecoins seek to give an alternative to the excessive volatility of the most popular cryptocurrencies, such as Bitcoin (BTC), which has rendered such assets unsuitable for widespread usage in transactions.

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