What does the crypto crash indicate for the investors?

What does the crypto crash indicate for the investors?

Cryptocurrency
May 16, 2022 by Diana Ambolis
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With cryptocurrencies falling today after the collapse of TerraUSD and Bitcoin trading having its most tumultuous week in at least two years, the question that has been circulating is why did the latest crypto slump happen. The entire crypto world consists of one perfect thing, a few imperfect things, and a host of dangerous things.
Can Cryptocurrency Survive the 2022 Recession?

With cryptocurrencies falling today after the collapse of TerraUSD and Bitcoin trading having its most tumultuous week in at least two years, the question that has been circulating is why did the latest crypto slump happen.

The demise of algorithmic stablecoin TerraUSD and its sibling token Luna reduced the crypto sector’s overall trillion-dollar value by more than $270 billion. The weekly net change in Bitcoin volatility, according to sources, was the largest in two years.

Luna was far from the only one who lost money in a week when cryptocurrency values fell by 30%. While some stocks have rebounded, the market has lost about $500 million (£410 million) in just seven days, raising existential questions about the market’s existence.

What led to the current bitcoin crash:

A financial “attack” on the stablecoin Terra (UST), which is designed to mimic the US dollar but is currently trading at barely 18 cents, and its partner coin Luna, which has since fallen, may have triggered the current crisis.

Such an attack is extremely complicated, and it includes making a large number of trades in the crypto market. In order to trigger precise effects – which might result in large profits for the “attacker.”

Stablecoins rely primarily on perception and confidence, and when these are shattered, massive decreases might occur. In this situation, these transactions led Terra’s value to plunge, causing Luna’s value to plummet as well. When this was found, it caused panic, which caused market withdrawals, which caused even more panic.

Furthermore, the recent sharp dips in cryptocurrency prices have cast doubt on stablecoins long-term viability. This is significant because they are meant to have minimal volatility by maintaining a “peg” to another underlying asset.

The cryptosphere has been affected by the ripple effects seen this week. Tether, the most popular stablecoin, has lost its peg and is now trading at 95 cents on the dollar, underscoring the need for regulation.

What is the crypto safe haven’s location?

It’s worth noting right now that the future of cryptocurrencies will be determined by how investors react. Investors may be doing more harm than good by panicking and despairing over comparisons to a traditional bank run. Stock market collapses are a better analog, as investors are anxious that their stocks and shares may soon be worthless. And based on how the crypto crisis has been received thus far, it looks that a large majority of crypto investors agree with this stance.

Many people have made cryptocurrency investments with the expectation of becoming wealthy. This belief has unquestionably been destroyed. Another motive to invest in cryptocurrencies is the belief that they will someday replace traditional forms of financial exchange.

For many investors, though, any increase in the value of a cryptocurrency is an indication that it is gaining traction against traditional money. A significant reduction in the value of cryptocurrency, on the other hand, is both a monetary and an ideological loss.

Cryptocurrencies Aren’t Always Consistent

The value of stablecoins is expected to be stable over time. Fiat currencies back them up like the US dollar, gold, and even other cryptocurrencies. The fall of Bitcoin impacted Terra and TerraUSD significantly. This is due to Terra’s inefficiency.

The Terra network’s native tokens are Terra (LUNA) and TerraUSD (UST). TerraUSD maintains its peg to the US dollar through algorithms. To mint UST, one must burn the equivalent amount of LUNA in dollars. The protocol does this to keep the UST price steady. It also works in the reverse direction.

Also, read – Stablecoins Explained: All you need to know

Terra’s creator, the Luna Foundation Guard (LFG), elected to add Bitcoin to its reserve in March 2022 to give its stablecoin more cushions. If something went wrong with the prices, the Bitcoin backing would keep UST afloat. Unfortunately, this did not happen, and the stock market, Bitcoin, and eventually the entire cryptocurrency market all fell.