Bitcoin tumbles, a stablecoin plunges in wild week in crypto

NEW YORK – It’s been a wild week in crypto, even by crypto standards.

Bitcoin tumbled, stablecoins were anything but stable and one of the crypto industry’s highest-profile companies lost a third of its market value.

Here’s a look at some major developments in cryptocurrencies from last week:

Bitcoin

The price of bitcoin dropped to around $25,420 this week, its lowest level since December 2020, according to CoinDesk. It steadied around $30,000 Friday, but that’s still less than half the price bitcoin fetched last November.

Some bitcoin proponents have said the digital currency could protect its holders against inflation and act as a hedge against a decline in the stock market. Lately, it’s done neither. Inflation at the consumer level rose 8.3% in April compared to a year ago, a level last seen in the early ‘80’s. With the Federal Reserve aggressively raising interest rates to try to tamp down inflation, investors are dumping risky assets, including stocks and crypto. The S&P 500 is down more than 15% this year. Bitcoin has dropped about 37% year to date.

Other cryptos have fared just as poorly. Ethereum has dropped 44% and dogecoin, a cryptocurrency favored by Tesla CEO Elon Musk, has lost about half its value.

Stablecoin collapse

Stablecoins have been viewed as a safe harbor among cryptocurrencies. That’s because the value of many stablecoins is pegged to a government-backed currency, such as the U.S. dollar, or precious metals such as gold. But last week, one of the more widely used stablecoins, Terra, experienced the cryptocurrency equivalent of a run on the bank.

Terra is a stablecoin in a cryptocurrency ecosystem known as Terra Luna. Terra is an algorithmic stablecoin, which means its supply is adjusted through complicated buying and selling to keep its peg to $1. Terra was also fueled by an incentive program that gave its holders high yields on their Terra. Luna was the coin meant to be used in the ecosystem to buy and sell assets, and at its peak it was worth more than $100.

Even though the developers of Terra said its algorithms would backstop the stablecoin, they decided to further backstop it with holdings of bitcoin.

Terra’s problems started from a combination of withdrawals of hundreds of millions, perhaps billions, of dollars from Anchor, a platform that supported the stablecoin. Combined with worries overall about cryptocurrencies, and the drop in bitcoin’s price, Terra started to lose its peg to the dollar. The bitcoin that Terra held was also worth less than they paid for it, and selling those bitcoin into the market caused bitcoin prices to fall even further.

Efforts by Terra’s developers to shore up liquidity failed. On Friday, May 13, Terra had fallen to 12 cents and Luna was trading at a value of less than one ten thousandth of one cent.

Coinbase lost about a third of its value last week, during which the cryptocurrency trading platform reported that active monthly users fell by 19% in the first quarter amid the decline in crypto values.