The cryptocurrency world came crashing down this week in a sell-off that graphically illustrated the risks of experimental and unregulated digital currencies.
The moment of panic represented the worst reset in crypto since Bitcoin crashed 80 percent in 2018, David Yaffe-Bellany, Erin Griffith and Ephrat Livni report for The New York Times. But this time, the price drop has a broader impact because more people and institutions hold the coins. Critics said the crash was long overdue, while some traders compared the alarm and fear to the start of the 2008 financial crisis.
“This is like the perfect storm,” said Dan Dolev, an analyst covering crypto and fintech companies at Mizuho Group.
The fall in cryptocurrencies is part of a broader pullback in risk assets, fueled by rising interest rates, inflation and economic uncertainty caused by the Russian invasion of Ukraine. Those factors have compounded the so-called pandemic hangover that began as life began to return to normal in the United States, weighing on the share prices of companies like Zoom and Netflix that have thrived during the shutdowns.
But the decline in cryptocurrencies is more serious than the broader stock market crash. While the S&P 500 is down 18 percent year-to-date, the price of Bitcoin is down 40 percent in the same period. In the last five days alone, Bitcoin is down 20 percent, compared to a 5 percent drop in the S&P 500.
Cryptocurrency prices peaked late last year and have since declined as fears about the economy have grown. But the crash gained momentum this week when TerraUSD, a stablecoin, imploded. Stablecoins, which are meant to be a more reliable medium of exchange, are typically pegged to a stable asset like the US dollar and are meant not to fluctuate in value. Many merchants use them to buy other cryptocurrencies.
TerraUSD was backed by a credible venture capital firm. But TerraUSD was not backed by cash, Treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that pegged its value to a sister cryptocurrency called Luna.
This week, Luna lost almost all her courage. That immediately had a ripple effect on TerraUSD, which fell to as low as 23 cents on Wednesday. As investors panicked, Tether, the most popular stablecoin and a linchpin of cryptocurrency trading, also faltered from its own $1 peg. Tether fell as low as $0.95 before recovering.
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