A possible shift in the crypto market?

6/6/2022, 01:46 PM
A possible shift in the crypto market?
finance, and economics.
Cryptocurrency prices have been dropping since late 2021, but something particularly dramatic happened in mid-May of this year.
Ethan Wu, who co-writes Unhedged, the FT's daily newsletter about markets and finance, said, "The crypto market is turning down. That puts a lot of selling pressure on these currencies, and it creates a generally fragile environment where a little bit of pressure can really cause something to crack, especially if the foundations are themselves not particularly sturdy." One type of cryptocurrency that is supposed to be more stable than others is known as a stablecoin. The point of a stablecoin is to help crypto investors more easily jump from a traditional currency like dollars or euros into crypto. While cryptocurrencies you might have heard of like bitcoin and ethereum are really volatile, the point of a stablecoin is that it’s always supposed to be a 1 to 1 exchange. Like one stablecoin equals one US dollar.
However, during this time, the downturn started to impact a certain stablecoin. Wu said, "There’s a stablecoin called terra. And then there is like a sister cryptocurrency called luna, which if they interact to ensure that terra is equal to $1." Terra, the stablecoin, collapsed in value and lost its peg with the dollar. Then luna’s price sank like a stone. The cryptocurrency’s price dropped to zero. And because luna and terra are interlinked, it was bad news for both of them.
Wu said, "The entire system is predicated on people’s faith. Once people’s faith gives out, you get a death spiral dynamic where a loss of confidence leads to a loss of confidence and so on and so forth. To where it’s $0 instead of $1." So the panic over terra luna then started to spread and it made its way to an even bigger stablecoin called tether. Tether is the stablecoin. It’s the largest one in circulation. The point of tether is that it’s supposed to be firmly locked to the US dollar. One tether token equals one US dollar. And as the panic ripped through crypto and stablecoins, tether became untethered. It lost its peg and sank to just above 95 cents.
Wu said, "It starts to give way. Crypto is seriously in trouble. It’s started to make people concerned. You know, are we playing with a house of cards here? How sturdy is this entire ecosystem?" At the end of this week, in mid-May, two stablecoins were not looking so stable. This called into question people’s faith in crypto and the future of the entire ecosystem.