Why is the cryptocurrency market panicking after the stablecoins crash?

We were telling you this yesterday: Bitcoin dropped below $30,000 for the first time since July 2021, while stablecoins did. suffered a staggering decline. It’s one thing for Bitcoin to see its value halve, but for stablecoins to do the same is a whole different issue and it’s still hard to measure its size.

This phenomenon can be seen especially in TerraUSD or UST, which is the stablecoin pegged to the dollar. After the initial drop to $0.65, the currency plunged into the abyss as it plunged lower. $0.22. This is not trivial and even particularly alarming. But to really understand what’s going on, you must first know concretely what a stablecoin is.

What is stablecoin?

First of all, a stablecoin a digital currency whose value is indexed to fiat currency – can be popularized with “traditional” such as euro or dollar. In other words, if we take the UST example, this being indexed to the dollar, 1 UST should therefore equal 1 dollar. The main interest of this system is to provide a way for investors to purchase cryptocurrencies that need to be stable unlike Bitcoin as they are actually dependent on the fiat currency they are tied to.

Another advantage is that these currencies create a reserve After a capital gain, it’s also a tax-free digital asset unlike other cryptocurrencies. Things get complicated when looking at the different types of stablecoins. Concretely, there are two: stablecoins backed by a pool of tangible assets like Theter (USDT), and algorithmic stablecoins. UST belongs to this second category. The difference is that algorithmic stablecoins are based on the transactions of their users.

The process is relatively simple: when the price drops, UST holders can resell their holdings to LUNA (the company that manages the stablecoin) for one dollar. Like this, Stablecoin reserve decreases, thus increasing its value until it returns to normal. But there is a catch. This system, which is usually quite efficient, does not take into account situations where users sell their assets en masse within a short period of time. Everything works as long as the market is open. Gold, this is far from being the case in recent weeks.

What caused Terra USD to drop?

Indeed, the unstable geopolitical context combined with the record inflation spreading around the world hurt financial markets since the beginning of the year. Cryptocurrencies are not protected as evidenced by Bitcoin’s historic decline in recent months. However, despite their nature, stablecoins are also subject to Bitcoin fluctuations. Facing a catastrophic situation, several investors parted ways at the same time with their assets because of this to protect yourself. Because of this, the currency experienced an initial decline.

In contrast, LUNA (equivalent to) having a Bitcoin reserve 2 billion dollars) for exactly this type of emergency, then sold everything to re-inject capital into UST. Today, however, the foundation’s portfolio is empty. Worse still, the Bitcoins purchased by LUNA were worth $42,000 at the time and have therefore lost more than 15% of their value since then. Since, There is panic everywhere.

not having no more feedback, investors continue to sell their USTs in bulk, group influence obviously not helping matters. In just one week, the total value of the stablecoin in the Anchor protocol 85% crashed. And the decline did not end, because confidence in the market is now gone. Some transfer platforms like Binance have even blocked all UST withdrawals from their users’ wallets in a desperate attempt to curb the phenomenon. Of course, he just didmagnify the general panic.

Currently, it is difficult to predict more broadly the future of stablecoins and cryptocurrencies. Yesterday, Terra’s creator, Do Kwon announced a recovery plan For the coming days, but did not give further details. According to some rumors, the foundation received another $1.5 billion to raise the price of UST. The latter will therefore be watched closely as it is now an excellent indicator of the state of the market as a whole.