Tipping point behind crypto ‘death spiral’ which saw $200 billion wiped in just one day
Categories: Bitcoin US
Billionaires have lost fortunes, markets are in panic mode and one expert has even gone as far as to declare that “crypto is dead”.But what has caused all the mayhem in the cryptocurrency world?In a nutshell, the latest drama was the result of a massive sell-off, as spooked investors raced to offload their assets.However, the reasons behind that mass sell-off are complex. Tipping point behind massive crash Over the past week, the value of bitcoin plummeted by almost 60 per cent from its highest-ever point.Insiders have put that phenomenon down to concerns that the US Federal Reserve’s attempts to kerb skyrocketing inflation would push the economy into a recession, which suddenly made less secure investments like cryptocurrency a seriously unattractive option.But this week, a far more specific crisis was unleashed, sending shockwaves through the industry. Shock collapse If we know one thing about crypto, it’s that it’s notoriously unstable and subject to both huge explosions in value – and crushing sudden drops.A solution to that instability was the invention of so-called “stablecoins” – cryptocurrencies that are “pegged” against the US dollar or other traditional assets, which in theory protected them from market bloodbaths.The idea behind that arrangement is that if Terra fell below $1, it could be swapped for Luna, which was supposed to ensure stability – but this week, both crashed simultaneously, with Luna collapsing by a devastating 98 per cent, with some investors losing their life savings. The same happened to fellow stablecoin Tether, which also broke its peg to the US dollar.And that turmoil in turn caused the price of other cryptocurrencies to plummet, with bitcoin falling to its lowest level since December 2020, with Ethereum also falling by 16 per cent. Crypto’s ‘death spiral’ While the crypto boom has attracted a legion of diehard fans, there have also been a slew of sceptics who from day one warned of the market’s innate instability.Henry Elder, who leads decentralised finance at digital asset manager Wave Financial, said the current stablecoin crisis was “exactly the ‘death spiral’ a lot of people predicted”.Meanwhile, Dan Ashmore, Crypto Data Analyst at Invezz.com, has also weighed into the drama, claiming one decision by Terra was the “key to their demise”. Mr Ashmore noted that earlier this year, Terra founder Do Kwon announced that bitcoin would be used as collateral in case of a scenario where large amounts of UST was sold off – a move that may have sealed its fate.“This is key, and it was a massive oversight by Terra. It doesn’t make much sense to collateralise an asset (UST) with a highly volatile asset (BTC). It makes even less sense when those two assets are correlated to each other,” he said.