With cryptocurrency trading lower today in the wake of TeraUSD’s collapse and the most volatile week for bitcoin trading in at least two years, the question is being raised as to why the current crypto crash happened?
It is important to note that the wipeout of the algorithmic stablecoin TeraUSD and its sister token Luna knocked over $270 billion from the total trillion-dollar value of the crypto sector. Reportedly, the weekly net change in bitcoin volatility was the highest in two years.
Luna was by no means the only victim in a week where cryptocurrencies were down 30%. While some have recovered somewhat, this still represents a total of seven days of losses of more than US$500 million (£410 million), prompting existential questions about the future of the market. .
What is causing the current crypto crash:
Interestingly, the current crash was probably triggered by a financial “attack” on stablecoins. Earth (UST), which is considered the equivalent of the US dollar, but is currently trading at only 18 cents and its partner coin, the Luna, later collapsed.
Such an attack is extremely complex, and involves placing multiple trades in the crypto market in an attempt to trigger certain effects – which could provide the “attacker” with a significant advantage.
In this case these trades caused Terra to fall, which in turn brought down its partner Coin Luna. Once this was noticed, it created panic, leading to a market rebound, which subsequently led to further panic. As news agency PTI reports, some (but not all) stablecoins rely heavily on sentiment and confidence – and once it shakes up, there could be a major downside.
Additionally, the recent major decline cryptocurrency has questioned whether stablecoins are stable. This is relevant because they are designed to have practically zero volatility by maintaining a “peg” to another underlying asset.
The effects seen this week spread across the crypto sector. Even major stablecoin Tether lost its peg, falling as much as 95 cents on the dollar, perhaps reflecting the need for regulation.
Where is the crypto safe place?
It is important to note at this point that how investors respond will be critical to the future of cryptocurrencies. With the panic and despair caused by comparing this crash to banks traditionally, investors could be doing more harm than good. A more accurate comparison is with a stock market crash where investors worry that the stocks and shares they hold may soon become worthless. And so far, the reaction to this crypto crash shows that a large section of crypto holders view their investments equally.
With many investing in cryptocurrency because they believed it would make them rich. 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.
However, for many investors, any increase in the value of cryptocurrencies is a demonstration of the increasing power of cryptocurrencies 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 inputs from agencies)