New York (AFP) – It’s been a wild week for cryptocurrency, even by crypto standards.
Bitcoin has plummeted, stablecoins are not at all stable, and one of the most prominent companies in the crypto industry has lost a third of its market value.
Here is a look at some of the major developments in cryptocurrency this week:
Bitcoin price dropped to around $25,420 this week, its lowest level since December 2020, according to CoinDesk. It settled around $30,000 on Friday, but that’s still less than half the price of bitcoin brought in last November.
Some bitcoin proponents have argued that the digital currency can protect its holders from inflation and act as a hedge against a downturn in the stock market. Lately, neither has happened. Consumer inflation rose 8.3% in April from a year ago, a level last seen in the early 1980s. With the Federal Reserve aggressively raising interest rates in an effort to curb inflation, investors are dumping risky assets, including stocks and cryptocurrencies. The S&P 500 is down more than 15% this year. Bitcoin is down about 37% since the beginning of the year.
Other cryptocurrencies have performed poorly. Ethereum is down 44% and dogecoin, a cryptocurrency favored by Tesla CEO Elon Musk, is down 53%.
Stable coins are viewed as a safe haven among cryptocurrencies. That’s because the value of many stablecoins is tied to a government-backed currency, such as the US dollar, or precious metals such as gold.
But this week, one of the most widely used stablecoins, Terra, saw its crypto equivalent in a bank scramble.
Terra is a stablecoin in a cryptocurrency ecosystem known as Terra Luna. Terra is an algorithmic stablecoin, which means it has adjusted supply through complex buying and selling to keep its peg at $1. The Terra was also supported by an incentive program that gave owners high returns on their Terra. Luna was the coin intended to be used in the ecosystem to buy and sell assets, and at its peak was worth over $100.
Although the developers of Terra said that its algorithms would support the stablecoin, they decided to back it with bitcoin holdings.
Terra’s problems started from a combination of hundreds of millions, possibly billions, of dollars withdrawn from Anchor, the platform that underpins the stablecoin. Along with general concerns about cryptocurrencies, and the drop in the price of Bitcoin, Terra is starting to lose its peg to the dollar. The value of the bitcoin that Terra held was less than what it paid for, and the sale of this bitcoin in the market caused the price of bitcoin to drop even more.
Terra developers’ efforts to support liquidity failed. On Friday, Terra fell to 14 cents and Luna traded for less than ten thousand of a cent.
Coinbase has lost about a third of its value this week, as the cryptocurrency exchange reported that active monthly users fell 19% in the first quarter amid a drop in crypto values.
Investors were running for exits even before Coinbase reported a quarterly loss of $430 million. Shares closed Thursday at $58.50. On the day of the initial public offering just 13 months ago, the shares hit $429 per share.
In a letter to shareholders, Coinbase said it believes the current market conditions are not permanent and that it has remained focused on the long-term with product development being a priority. While most Wall Street analysts expect Coinbase to weather the storm, they also warn that increased crypto regulation could hinder the company’s growth.
There has been a lot of talk about regulating cryptocurrency, but little in the way it works.
In response to the volatility in the cryptocurrency markets this week, Treasury Secretary Janet Yellen said Thursday that the United States needs a regulatory framework to protect against risks surrounding cryptocurrencies and stablecoins.
In March, Federal Reserve Chairman Jerome Powell said that new forms of digital money such as cryptocurrencies and stablecoins pose risks to the US financial system and will require new rules to protect consumers. This Monday, right before Terra’s crash, the Federal Reserve said in its semi-annual Financial Stability Report that stablecoins are vulnerable to “runs” that could harm coin holders.
Securities and Exchange Commission Chairman Gary Gensler said that the crypto industry is “rife with fraud, fraud, and abuse” and that his agency needs more power from Congress — and more funding — to regulate the market.
Britain has unveiled plans to regulate stablecoins as part of a broader plan to become a global hub for digital payments. European Union lawmakers have approved draft rules for crypto assets, but they still have to negotiate a final bill.
This was contributed by Christopher Rogaber, an economics writer for the Associated Press.