Uncomfortably Quiet Returns After Crypto’s “Death Spiral” $270 Billion Meltdown


Kryptos’ $270 Billion Meltdown Gives Way to an Uneasy Peace

Even by the white-knuckle standards of the cryptocurrency universe, it was an extraordinary week.

An algorithmic stablecoin called TeraUSD crashed from its dollar peg when a complex mechanism designed to ensure LINK suddenly turned against it, sending even the largest digital asset to panic selling. Got sucked into the vortex. Words such as “death spiral” entered the vernacular.

By the middle of the week, the turmoil pulled down the $80 billion Tether stablecoin — a major force in the market’s huge and numerous transactions — prompting its issuer to reassure investors that all is well. . Exchange-traded products involving crypto were also affected, with one causing the troubled Luna token to drop 99% in a single day.

On Friday, there was a return of calm in the crypto markets. But in the most volatile week since October for bitcoin, the tally was still steady, according to CoinMarketCap, with a cryptocurrency market cap of $270 billion. Add to this a broader question: What other corners of the crypto universe could soon unravel and cause such a market downturn?

“The implications for space and the post-mortem we have learned are important and important lessons,” Mati Greenspan, founder of crypto research firm Quantum Economics, wrote in a newsletter published late Thursday.

Despite jumping 8.5% on Friday, bitcoin is still down 13% over the past five days, while the second-largest token, Ether, is down 20%. The smaller so-called altcoins have taken an even bigger hit. Luna, the token that helped TeraUSD maintain its peg, has lost almost all of its value.

Still, despite the tough week, many cryptos made big jumps at the end of the week, rallying with a 2.6% advance in the S&P 500 and a gain of nearly 4% in the Nasdaq 100. Solana, Cardano and Avalanche each added at least 17% on Friday, Bloomberg data shows.

As the chaos surrounding the TeraUSD (UST) deepened, the Terra blockchain that underpins it stopped processing transactions for the second time in less than a day. TerraForm Labs said in a tweet from its verified account that Verifiers, the entities responsible for verifying transactions on the blockchain, took steps to “come up with a plan to reorganize” the Terra network.

“We were shocked to see that a huge platform like Terra has been shut down. This is unprecedented,” said Mihir Gandhi, a partner at PwC and leader of its payments transformation business in India. “The world of stablecoins is looking worrying.”

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More traditional stablecoins such as Tether, USDC and Binance USD – which hold dollar equivalents and other reserves backing their pegs – were trading on a par with the greenback on Friday, suggesting that the collapse of UST has yet to hit such tokens. Haven’t lost faith. Yet regulators have taken note of the episode and are vowing to increase surveillance.

There are other challenges facing cryptocurrencies, not least in their tendency to trade as much as technology stocks. Bitcoin’s 40-day correlation with the Nasdaq 100 index is currently at 0.82, close to a record, data compiled by Bloomberg shows. A correlation of 1 indicates that the two assets trade in perfect harmony; A reading of -1 means they trade the opposite way.

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The tight link with equities has undermined the argument that cryptocurrencies are a good diversifier in times of stress. Instead, they are being dumped along with other asset classes in a tight monetary policy environment.

Federal Reserve Chairman Jerome Powell reaffirmed Thursday that the central bank will raise interest rates by half a percentage point in each of its next two meetings, and that it could potentially go ahead. Powell, who has been trying to contain the fastest inflation in four decades, admitted in an interview with the Marketplace Public Radio program that the Fed should have moved earlier.

Edward Moya, senior market analyst at Oanda, said in an email late Thursday that bitcoin’s fall below $30,000 has created a “critical entry point for many institutional investors.”

“Confidence in cryptocurrencies is waning, but it looks like we are nearing the end of the market selloff,” he said. “Bitcoin has bounced back from $25,424, but it won’t last long if risk appetite doesn’t stabilize soon.”

– With assistance from Emily Nicholl, Suvashree Ghosh, Tanzil Akhtar, Akshay Chinchalkar and Vildana Hajrik.

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