Bitcoin is continuing to trade below $30,000 (£23,966), a week after Terra’s Luna stablecoin collapsed.
Cryptocurrency was already enduring a difficult 2022 before Luna lost almost the entirety of its value, costing some investors millions.
Bitcoin is trading at less than half of its record high, which it hit in November. Other major coins have suffered similar declines.
Here are the prices as of Thursday afternoon:
Why did cryptocurrency crash?
Currently, investors appear to be moving away from cryptocurrency and towards less risky investments in the face of global inflation.
Crypto has been hurt further by a sharp drop in US stock prices.
Analysts at crypto exchange Bitfinex said: “Bitcoin is trading lower today after yesterday’s steep drop in US stock prices.
“Spiraling levels of inflation has left global financial markets staring into the abyss as the prospect of a global recession looms large.
“This is leaving all assets that have benefited from more than a decade of accommodative monetary policy from central banks vulnerable to a correction as interest rates rise.”
Morgan Stanley says the interest of institutional investors in cryptocurrency makes it more sensitive to changing interest rates, and makes it behave more like the traditional stock market.
“Retail investors are no longer the dominant crypto trader. The largest proportion of daily crypto trading volumes is from crypto institutions, much of which comes from them trading with each other. For example exchanges, custodians, and crypto funds,” the company wrote in a note.
“Retail traders were dominant around four years ago, when Bitcoin traded below $10k. We think the increased involvement of institutions, which are sensitive to availability of capital and therefore interest rates, has contributed in part to the high correlation between Bitcoin and equities.”
Will cryptocurrency recover?
As ever with cryptocurrency, the future is uncertain.
One factor that could provide hope to crypto investors is that big players are starting to join the party.
On Wall Street, JPMorgan Chase, Morgan Stanley and Goldman Sachs are among the firms that n dedicated cryptocurrency teams. Meanwhile, mainstream hedge funds, managed by the likes of Alan Howard and Paul Tudor Jones, are pouring billions into digital currencies.
Paul Veradittakit, partner at digital asset manager Pantera Capital, told Bloomberg: “Compared to 2018, there are more institutional investors with exposure to crypto and most see this as a buying opportunity.”
Kate Rouch, chief marketing officer, Coinbase is bullish about crypto’s future.
“Volatility is painful, and can be scary,” she wrote in a blog post. Nobody likes to lose money in the short term – whether in crypto, or the stock market more broadly.
“That said, volatility is also natural for emerging technological breakthroughs like crypto.
“At Coinbase, we’re inspired by the long term view and the spirit of those who continue to keep innovating no matter the external environment.”
What happened to 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 Cosmos SDK; a framework that allows developers to create custom blockchains and build their own decentralised applications on top of Terra for various use cases.
“As of now, The Terra ecosystem contains more than 100 of these natively built projects. These include non-fungible token (NFT) collections, decentralised finance (DeFi) platforms and Web 3 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-life currency.
UST is pegged to the US dollar, which means one UST is always supposed to be worth around the same as one dollar. Luna plays a vital part in this.
CoinDesk says: “Instead of relying on a reserve of assets to maintain their peg, UST is an algorithmically stabilised coin. This involves using a smart contract-based algorithm to keep the price of UST anchored to $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 swap the Luna token for UST, and vice versa, at a guaranteed price of $1 – regardless of the market price of either token at the time.
Luna crashed due to Terra losing its peg to the dollar, due concerns over the Federal Reserve’s looming interest-rate hike.
UST’s value fell, which led to the algorithm issuing more Luna coins to try and recorrect. However, Luna’s value was also spiralling downwards.
CoinDesk analyst George Kaloudis said: “The total supply of Luna went from about 725 million tokens on 5 May to about 7 trillion on 13 May. Meanwhile, Luna lost 99.9 per cent of its value. This is what hyperinflation looks like.”
The coin’s value tumbled from around $6.75 to less than one cent over just a couple of days, and is valued at $0.0002 as of Monday morning.
Leading crypto exchange Binance temporarily suspended withdrawals on Luna on Wednesday, and on Thursday night the Terra blockchain temporarily halted.
Terra said it made the move to “prevent governance attacks”.
Terra’s official Twitter account added on Friday: “A post-mortem on everything that transpired the past week is in progress. It will be published ASAP.
“These are tremendously difficult times for everyone affected. The feelings are still raw. Please be safe.”
How risky is cryptocurrency?
People invest at their own risk and cryptocurrencies are not regulated by British financial authorities.
All crypto investments are risky, but meme coins like Shiba Inu are particularly volatile, and you should be prepared to lose everything you invest.
The Financial Conduct Authority (FCA) warned in January: “Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money.
“If consumers invest in these types of product, they should be prepared to lose all their money.”
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown previously explained the risks to i.
She said: “On top of being extremely 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.”
