The week not only taught investors to invest carefully, but it also busted many myths about the cryptocurrency market.

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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. 

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Bitcoin was last trading down 10% at $53,991 as of 1320 GMT, a whopping $12,000 below record highs set on Wednesday. Smaller rival Ether, the coin linked to the ethereum blockchain network, dropped 10% to $2,101.

Data website CoinMarketCap cited a blackout in China’s Xinjiang region, which reportedly powers a lot of bitcoin mining, for the selloff.

Luke Sully, CEO at digital asset treasury specialist Ledgermatic, said in an email that people “may have sold on the news of the power outage in China and not the impact it actually had on the network”.

“The power outage does expose a fundamental weakness; that although the Bitcoin network is decentralized the mining of it is not,” Sully added.

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Read more: http://www.digitaljournal.com/pr/4996644#ixzz6sOVaoJj1

Some widely-followed blockchain analysts on Twitter pointed to a sharp drop in “hash rate” due to the outage.

Hash rate refers to the volatility index that measures the processing capacity of the entire Bitcoin network, and it determines the power required by miners to produce new Bitcoins.

“Typically shocks to hash rate do not cause price drops. A hash rate reduction slows transactions, which ironically makes it harder to move coins to exchanges for sale. The recent price drop is well within the bounds of typical volatility, it is noise not signal,” said Edan Yago, co-founder at Bitcoin-based decentralised finance protocol Sovryn.

The retreat in Bitcoin also comes after Turkey’s central bank banned the use of cryptocurrencies for purchases on Friday.

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Edward Moya, senior market analyst at OANDA, said cryptocurrencies had been ripe for a pullback.

“The market has become overly aggressive and bullish on everything,” said Edward Moya. “It could have been any bearish headline that could have triggered this reaction.”

Many cryptocurrency markets operate 24/7, setting the stage for price swings at unpredictable hours. Historically, retail and day traders have driven the moves.

Despite the sudden selloff, bitcoin is still up 89% so far in 2021, driven by its mainstream acceptance as an investment and a means of payment, accompanied by the rush of retail cash into stocks, exchange-traded funds and other risky assets.

Source – https://www.reuters.com/

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Chief Executive Officer Elon Musk on Wednesday tweeted that “you can now buy a Tesla with Bitcoin,” and that paying by Bitcoin will also be available to customers outside the U.S. later this year. He added Tesla will only use internal and open-source software, and that any Bitcoin paid to the company will be retained as Bitcoin and not converted to a fiat currency.

California-based Tesla disclosed its $1.5 billion investment in Bitcoin in February, and signaled its intent to begin accepting the cryptocurrency as a form of payment at the time, sending prices to a record. The world’s leading EV maker made the Bitcoin bet after updating its investment policy in January to allow it to buy digital assets.

Bitcoin rose 3% to $56,108 as of 8:33 a.m. in London.

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In addition to lending increased legitimacy to electronic currencies, Musk’s embrace of Bitcoin fits his maverick image. The billionaire has often tweeted about cryptocurrency-related topics and recently called Bitcoin “a good thing” in an interview. Dogecoin, the once tongue-in-cheek digital currency, also soared to records in February after Musk, rapper Snoop Dogg and Kiss bassist Gene Simmons tweeted about it.

Source: Tesla Now Accepts Bitcoin as Payment for Cars, Musk Says | Newsmax.com

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