BITCOIN TUMBLES, STABLECOIN PLUNGES IN WILD WEEK
Cryptocurrency falls along with stocks as interest rates rise
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 this 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 percent in April compared with a year ago, a
level last seen in the early ’80s.
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 percent this year. Bitcoin has dropped about 37 percent
year to date.
Other cryptos have fared just as poorly. Ethereum has dropped 44 percent, 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 this 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, Terra had fallen to 12 cents and Luna was trading at a value of less than one ten thousandth of one cent.
Coinbase
Coinbase lost about a third of its value this week, during which the cryptocurrency trading platform reported that active monthly users fell by 19 percent in the first quarter amid the decline in crypto values.
Investors had been running for the exits even before Coinbase reported a $430 million quarterly loss. Shares closed Friday at $67.87. On the day of its initial public offering just 13 months ago, shares reached $429 each.
In a letter to shareholders, Coinbase said it believed that current market conditions were not permanent and it remained focused on the long-term while prioritizing product development.
While most Wall Street analysts expect Coinbase to weather the storm, they’re also warning that increased regulation of cryptocurrencies could hamper the company’s growth.