Crypto Crash: What Investors Need to Know
Crypto Crash – Bitcoin’s value fell by more than half its value since its November 2021 peak, which caused the entire cryptocurrency market to collapse. Terra (LUNA) and TerraUSD (UST) both experienced such steep declines that investors may be spooked. When both cryptocurrencies were enjoying their honeymoon period a month ago, who would have thought they would face such a steep fall? The weak sentiment spread across the crypto market resulted in investors withdrawing their money, causing Tether (USDT) to lose its peg to the dollar.
The week not only taught investors to invest carefully, but it also busted many myths about the cryptocurrency market.
Read Also – Robinhood soars after 30-year old crypto billionaire buy-in
Bitcoin May Not Be the Best Hedge Against Inflation
The crypto market has been moving in sync with the stock market for the past few months. The correlation between Bitcoin and the S&P 500 hit a high of 17 months in March 2022,1 demonstrating that crypto and stock markets are moving in the same direction.
Bitcoin is often seen as a good hedge against inflation. That means inflation doesn’t affect the top cryptocurrency. It might not be true every time; at least, that’s what the market witnessed this week. High inflation and tighter monetary policy affected crypto investors as well, resulting in the collapse of the market. These developments show that crypto has a bigger market now and is becoming more mainstream.
Stablecoins Aren’t Always Stable
Stablecoins are supposed to maintain their value. They are backed by fiat currencies like the US dollar, gold, and even other cryptocurrencies. The collapse of Bitcoin badly affected Terra and TerraUSD. The functioning of Terra is to blame for this.
Terra (LUNA) and TerraUSD (UST) are two native tokens of the Terra network. TerraUSD aims to maintain its peg to the US dollar using algorithms. So if one wants to mint UST, he needs to burn the dollar-equivalent amount of LUNA. It works the same way the other way around. That’s how the protocol maintains the price of UST.
In March 2022, to add more cushion to its stablecoin, Terra’s creator, the Luna Foundation Guard (LFG), decided to add Bitcoin to its reserve, according to TechCrunch.com. The idea was if something goes wrong with the prices, Bitcoin-backing would help to stabilize UST. Unfortunately, that didn’t happen, and the stock market collapsed, Bitcoin collapsed, and then the whole crypto market collapsed.