Market looks for direction after Terra Crash

  • The cryptocurrency market lost $400 billion over the week as two stablecoins lost their pegs to the US dollar.
  • The losses put the algorithmic stablecoin TerraUSD and the “traditional” stablecoin Tether in the spotlight.
  • TerraUSD’s sister coin, Luna, plunged to $0 in a spectacular sell-off.

The latest cryptocurrency selloff emanating from unexpected dollar-peg losses by TerraUSD and Tether tested investor confidence this week, and could amplify calls for Washington to work faster on regulation, experts said. experts to Insider.

While Bitcoin showed signs of stabilizing above $30,000 on Friday, the crypto market saw more than $430 billion disappear from the market valuation between Monday and the middle of Thursday, raising the cap to $1.12 trillion, according to data from CoinMarketCap.

The price declines of TerraUSD and its sister coin Luna highlighted algorithmic stablecoins whose values ​​are derived from a combination of computer codes and reserves to maintain a peg to a fiat currency. The market turmoil spilled over into Tether, sending the market’s third most valuable cryptocurrency briefly below its parity of $1 before regaining parity.

“If there is a complete loss of confidence with stablecoins, then you can see that the market will really struggle to find a balance here,” Ed Moya, senior market analyst at forex trading platform Oanda, told Insider. “Terra was flawed and that was seen by a lot of people. Tether is [recovering] his peg,” a move that should calm some nerves, he said.

Bitcoin this week dipped below $27,000 for the first time since late 2020 as investors navigated the Terra-Luna crash and Tether’s temporary slide. Investors in the past have questioned what reserves Tether has to back its peg.

“There were definitely some unique features to this [crypto selloff]”, including one that took place in a broader financial market facing decades of high inflation and a war between Russia and Ukraine, said Chris Kline, chief operating officer and co-founder of Bitcoin IRA.

“Then you add this component of these stablecoin experiments, and UST is a new experiment of a stablecoin that was built differently than the previous ones,” Kline said. “This was done algorithmically, which helps with its efficiency. The intent is the future of crypto and blockchain and how we use this technology in general… and it had a weakness and its weakness was exploited one way or another.” Kline said. .

As UST lost its peg, its holders tried to collect through the moon instead of selling UST on the market. That spurred more minting of moon tokens as UST was burned. CryptoCompare said that more than 6 trillion new luna tokens had been minted since May 8, diluting its price to $0.00000953.

“We do not believe there is a risk of a permanent disengagement from…[Tether]but the fear in the markets has had contagion effects throughout the sector,” CryptoCompare, a market data provider, said in a note.

of Moon


market cap

it was $41 billion just five weeks ago and fell to less than $7 million this week, marking the “largest wealth destruction in this amount of time on a single project in cryptocurrency history,” CryptoCompare said.

regulatory clock

The cryptocurrency selloff caught the attention of Treasury Secretary Janet Yellen, who told lawmakers that stablecoin losses do not yet threaten financial stability, but the risks could quickly mount. Fitch Ratings said this week that it expects recent events to lead to an increase in stablecoin regulatory calls.

“I have been saying for a long time that the need for regulatory clarity is crucial to allowing the crypto market to mature,” Scott Sheridan, CEO of Tastyworks, a


online brokerage

platform for options traders, he wrote in an email to Insider.

“If we can get some regulatory clarity that allows US-listed exchanges to start offering derivatives, I think the whole game changes,” he says. “Plus


liquidity

It means tighter bid/ask spreads and more price stability overall.”

In the meantime, the cryptocurrency market may need to see a sustainable rise in equities to start gaining traction, as cryptocurrencies have recently been strongly correlated with the Nasdaq. Moya at Oanda sees $30,000 acting as intraday resistance for bitcoin in the near term.

He said that the $30,000 level would be key for many institutional investors who bought last year.

For bitcoin to test the $20,000 level in another crash would be “heartbreaking,” he added.

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