Cryptocurrency prices fell again over the weekend after showing signs of recovery.
Bitcoin drops back below $30K (£24,500), as the market continues to feel the effects of Terra’s devastating crash along with a general cooling in enthusiasm.
Here are the prices of the major currencies as of Monday morning:
- Bitcoin – $29,650 (£24,250)
- Ethereum – 2015 dollars (1,650 GBP)
- XRP – $0.42 (£0.34)
- Solana – $53.80 (£44)
- Crypto.com – $0.19 (£0.16)
- Cardano – $0.55 (£0.45)
- Avalanche – $33.50 (£27.40)
- Stellar – $0.13 (£0.10)
- Dogecoin – $0.087 (£0.071)
- Shiba Inu – $0.00012 (£0.000010)
- Luna – $0.0002 (£0.00016)
Why is cryptocurrency struggling?
Cool the mood around cryptocurrencies.
It seems that investors are turning away from cryptocurrencies and moving towards less risky investments in the face of global inflation.
The crash is also linked to the collapse of terraUSD (UST) after losing its peg to the dollar, which also wiped out Luna, the support currency.
Changpeng Zhao, CEO of crypto exchange Binance tweeted on Sunday: “We witnessed the rapid decline of a major project, which sent ripples across the industry, but also found new market resilience that was not present during the past market downturn.”
Another bad news last week was Coinbase, the largest US cryptocurrency exchange, which posted a net loss of $430m (£348m), much worse than analysts had expected, causing its share price to drop sharply.
Coinbase referred to the “low trend in crypto-asset prices and volatility that began in late 2021,” but quickly indicated that it does not expect these conditions to be “permanent.”
The news raised questions about whether the market has reached an expected cooling-off period – formerly called “crypto winter” – or a perpetual cold, perhaps the “crypto ice age”.
“The worry now for crypto-asset investors is when the slippage will end,” said Simon Peters, crypto market analyst at trading platform eToro.
“The market is caught up in a broader plight of investment markets struggling to set comfortable levels in the wake of rising interest rates designed to quell spiraling inflation across the Western world.”
What happened to Terra (Luna)?
Luna and TerraUSD (UST) are both native tokens of the Terra Network, a blockchain-based project developed by Terra Labs in South Korea.
CoinDesk explains: “The Terra blockchain is built on the Cosmos SDK; a framework that allows developers to create custom blockchains and build their own decentralized applications on top of Terra for different use cases.
“As of now, the Terra ecosystem has more than 100 of these projects built locally. These include non-fungible tokens (NFTs), Decentralized Finance (DeFi) platforms and 3 web applications.”
The goal of Terra is to be a peer-to-peer electronic cash system.
It aims to do this through the use of “stablecoins”, which are cryptocurrencies pegged to a real currency.
The UST is pegged to the US dollar, which means that one UST is always assumed to be roughly the same as the US dollar. Luna plays a vital role in this.
“Instead of relying on reserve assets to maintain their peg, terrestrial treasuries are a computationally stable currency,” says CoinDesk. “This involves using a smart contract-based algorithm to keep the price of terrestrial treasuries constant at $1 by burning (permanently destroying) Luna tokens in order to mint (Create) new UST tokens.”
In the Terra ecosystem, users are meant to always be able to exchange the Luna token for UST, and vice versa, for a guaranteed price of $1 – regardless of the market price of any of the tokens at the time.
Luna was devastated by Tera losing its peg to the dollar, due to concerns about a looming interest rate hike by the Federal Reserve.
The value of the floor treasuries decreased, causing the algorithm to issue more luna coins to try to correct it. However, Luna’s value was also spiraling downward.
“The total supply of Luna has increased from about 725 million tokens on May 5 to about 7 trillion on May 13. Meanwhile, Luna has lost 99.9 percent of its value. This is what hyperinflation looks like,” CoinDesk analyst George Kaloudis said.
The coin plummeted from about $6.75 to less than a cent in just two days, and was valued at $0.0002 as of Monday morning.
Leading cryptocurrency exchange Binance temporarily suspended withdrawals on Luna on Wednesday, and on Thursday night, the Terra blockchain platform was temporarily suspended.
Terra said she took the step “to prevent referee attacks”.
Terra’s official Twitter account added on Friday: “Post-mortem examination is underway on everything that happened last week. Will be posted as soon as possible.
“These are very difficult times for all those affected. Feelings are still harsh. Please, stay safe.”
Will Cryptocurrency Rebound?
As always with cryptocurrencies, the future is uncertain.
One factor that could provide hope for cryptocurrency investors is that big players are starting to join the party.
On Wall Street, JPMorgan Chase, Morgan Stanley, and Goldman Sachs are among the companies with teams dedicated to cryptocurrency. Meanwhile, major hedge funds, run by the likes of Alan Howard and Paul Tudor Jones, are pumping billions into digital currencies.
Paul Viraditakit, Partner at Digital Asset Manager Pantera Capital, said: Bloomberg: “Compared to 2018, there are more institutional investors who are taking cryptocurrency and most of them see it as a buying opportunity.”
Brian Nick, chief investment strategist at Novin Bloomberg: “What gets punished when financial conditions contract? Anything with a high valuation and uncertain or non-existent revenue streams.
“And crypto has indisputably high valuations and there is no revenue stream. That is a big part of what we see in growth stocks, technology. It is related but obviously more volatile because the market is less liquid.”
How dangerous is cryptocurrency?
People invest at their own risk and cryptocurrencies are not regulated by the British financial authorities.
All cryptocurrency investments are risky, but meme coins like Shiba Inu are especially volatile, and you should be prepared to lose whatever you invest.
The Financial Conduct Authority (FCA) warned in January: “Investing in crypto-assets, or investments and related lending, generally involves an extremely high risk of investor money.
“If consumers invest in these types of products, they should be prepared to lose all of their money.”
Susanna Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown previously explained the risks faced me.
“In addition to being highly volatile, most cryptocurrencies are unregulated, which not only adds another layer of uncertainty, but also means that investors have little or no protection against fraud,” she said.