A massive sell-off in cryptocurrency saw over $200 billion in wealth wiped off the cryptocurrency market in 24 hours. This is according to data from CoinMarketCap.
The crash in the crypto complex, caused by the collapse of the TerraUSD stablecoin, has hit most crypto coins very hard. Bitcoin, the largest cryptocurrency by market cap, slipped by 10% in the last day, falling to $25,401.29, according to Coin Metrics. This is the lowest level the crypto coin has dropped since Dec. 2020. It has since then pared its losses and it was lastly trading at $28,569.25, down by 2.9%. This year alone, Bitcoin has dropped by over 45 percent. From its November 2021 peak of $69,000, it has lost two-thirds of its value.
Ethereum, the second-largest cryptocurrency, dropped to as low as $1,704.05 per coin. This is the first time the crypto token has fallen below the $2,000 mark since June 2021.
Investors are running away from cryptocurrency investments. This comes at a time when stock markets have dropped from the highs of the coronavirus pandemic over fears of soaring prices and a weakening economic outlook. On Wednesday, the U.S inflation data showed that the prices of goods and services have increased by 8.3% in April, which is higher than what analysts expected and close to the highest level reached in 40 years.
The crypto crash showed signs of spreading further as cryptocurrency-related stocks also cratered in Asia. BC Technology Firm Ltd., a Hong Kong-listed fintech firm, closed down 6.7%. Japan’s Monex Group Inc., the owner of CoinGecko and TradeStation marketplaces, closed the day down 10%.
As central banks across the world tighten their monetary policy in response to the rising inflation, digital assets have faced selling pressure. On Thursday, S&P futures lost 0.8%, tracking the benchmark MSCI Asia Pacific Index losses.
The downfall of the stablecoin protocol Terra is also weighing on the minds of cryptocurrency investors. TerraUSD, also UST, should mirror the value of the dollar. However, it slipped to below 30 cents on Wednesday, shaking the investors’ confidence in the cryptocurrency space.
Stablecoins are similar to the bank accounts of the barely regulated crypto world. Cryptocurrency investors usually run to stablecoins during times of volatility in the cryptocurrency market. But UST, which is an “algorithmic” stablecoin underpinned by code instead of cash held in a reserve, has found it hard to maintain a stable value as the crypto holders exit in mass.
On Thursday, the UST price on most cryptocurrency exchange platforms was 41 cents, which is far below the intended $1 peg. Luna, another Terra token with a floating price and meant to absorb the UST price shocks, wiped off 99% of its value and it’s now worth only 4 cents.
Cryptocurrency investors are now scared of the implications on Bitcoin. Luna Foundation Guard, a fund created by Terra founder Do Kwon, had piled up Bitcoins worth multiple billions to support UST in a time of crisis. There are fears that the Luna Foundation Guard may sell out a large part of its Bitcoin holdings to support its weakening stablecoin. This is very risky at a time when Bitcoin price is incredibly volatile.
UST’s collapse has raised fears of market contagion. Tether, the biggest stablecoin in the world, also saw a drop in its $1 peg on Thursday, sinking to 95 cents at one point. For a long time, economists have feared that Tether may lack an adequate amount of reserves to retain its $1 peg in case of mass withdrawals.