Crypto Crash: What investors should know

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The price of Bitcoin has fallen more than half of its value since it peaked in November 2021, causing the entire cryptocurrency market to collapse. Both Terra (LUNA) and TerraUSD (UST) have seen significant reductions so that investors can be criticized. When the two cryptocurrencies were enjoying their holiday season a month ago, who would have thought that they would face such a hike? The weak sentiment pervading the crypto market prompted investors to withdraw their funds, causing Tether (USDT) to lose its peg to the dollar.

Not only did the week teach investors to be cautious about investing, it also broke many myths about the cryptocurrency market.

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, 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.

Terra (LUNA) is currently trading at $0.000000999967 per token, a 14.359% decline from an all-time high of $119.18 in April 2022, according to coingecko.com. TerraUSD (UST), which has lost its dollar peg, is currently trading at $0.13, reported coingecko.com.

The bloodbath spread over to the other stablecoins, such as Tether (USDT), the largest stablecoin, which lost its peg to the dollar. On May 12, UST’s price hit an all-time low of $0.6841 at one point. That means the holders of USDT have tokens worth less than $1. However, the token is currently back on its track, trading at $1, according to coingecko.com.

The Bottom Line

The crypto crash taught many lessons this week. Even the top altcoins like Terra can suffer overnight losses and struggle to survive. The idea behind decentralized algorithm stablecoin, such as TerraUSD, looks fascinating, but it needs a better strategy. The centralized stablecoins like Tether (USDT), which are often criticized for insufficient cash reserves, look helpless in times of crisis.

This week will go down as a historical moment in the crypto industry and serve as a wake-up call for crypto enthusiasts who need to understand that a lot of work needs to be done.

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