Why did the cryptocurrency market crash? An answer for Bitcoin, Luna and other cryptocurrencies?

Why did the cryptocurrency market crash? An answer for Bitcoin, Luna and other cryptocurrencies?

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Answer Why did the cryptocurrency market crash? An answer for Bitcoin, Luna and other cryptocurrencies?

The cryptocurrency market is experiencing one of its worst selling since the rally during 2020, which has sparked panic among investors and raised questions about why cryptocurrency prices are increasingly sensitive to fluctuations in the stock market.

First, the scary decline of stablecoins. This type of cryptocurrency, as its name suggests, is supposed to have a fixed value because the tokens are tied to the value of a currency like the US dollar or a commodity like gold, providing relative protection from extreme volatility. collapses! Why?

Why did Bitcoin and other cryptocurrencies drop?

Market experts say that there are two main factors driving the recent downturn in the cryptocurrency market, the moves of the US Federal Reserve to combat high inflation and stabilize the markets, and the internal collapse of terraUSD, one of the stablecoins.

Read:Ethereum reaches $2800 and the gap between it and Bitcoin is narrower than ever

In early 2020, the Federal Reserve lowered interest rates, or the cost of borrowing, to manage the economic recession caused by the pandemic, and pumped more money into the market and businesses, with the result that inflation rose to a four-decade high.

The abundance of liquidity has also driven prices up in most asset classes, including the traditional equity and cryptocurrency markets, as traders have invested their money expecting stronger returns, and are significantly threatening economic growth.

To control the damage, the Federal Reserve raised interest rates in May by half a percentage point, the largest increase in nearly two decades.

The Fed is also reducing the money supply to curb the creep of inflation further and is expected to keep raising interest rates in the future, all of this is making investors nervous.

The S&P 500 and Nasdaq are down more than 20% since the beginning of the year, while the cryptocurrency market cap has more than halved from its peak of nearly $3 trillion in November to $1.3 trillion now, according to data compiled by CoinGecko. ”, which analyzes the cryptocurrency market.

This sent the bitcoin price below $30,000 earlier this week, for the first time since July.

Read:A group of Ethereum developers infected with the Corona virus from an Ethereum conference

TerraUSD disaster

Terra USD, commonly known as UST, and its impact on the other cryptocurrency luna, these two cryptocurrencies created by Terra Network, a blockchain project developed in South Korea, Luna acts as a side currency for UST.

Stable coins, including Terra USD and Luna, have been described as a class of crypto assets that provide more stability during market volatility.

The value of the UST token is pegged to the US dollar, which means that at all times, the value of the UST must be one dollar. If the value falls below the dollar, the coin can be burned and exchanged for a dollar worth the luna.

Luna came into trading in May 2019, for about $3 until it reached an all-time high of about $116 last April, according to CoinGecko data, at a time when most other high-volume cryptocurrencies were dropping.

Over the past week disaster struck, the currency peg was broken, and for the first time, the value of UST fell to less than a dollar and sank to less than 30 cents.

What happened to Luna?

With the UST price crash, Luna holders benefited from the selling difference, causing the supply of its tokens to surge, and its price to crash, with Luna losing 99% of its value last Thursday.

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According to Bloomberg, the sharp drop in the value of the Luna looked like the worst day for a currency in history, prompting cryptocurrency exchanges to delist the currency and halting its trading due to the lack of liquidity in the market.

One possible reason for the severity of this collapse is the pricing structure of the UST token, said Edward Moya, chief market analyst at OANDA, a foreign exchange platform.

UST works differently from other stablecoins, such as Tether, which is backed by a government-backed commercial paper or currency. It is an algorithm-based stablecoin that uses a complex method, with the help of Luna, to ensure that its value against the dollar is maintained.

While UST fell to 30 cents, Luna’s price fell to $0.0001655, from about $81 earlier this week.

Last Thursday, Terra announced that it would develop a plan to re-form the currency again.

The Federal Reserve recently referred to stablecoin concerns in its semi-annual Financial Stability Report, saying that the fast-growing sector, which makes up nearly 15% of the total cryptocurrency market capitalization, is vulnerable to collapse when risks spread to traditional markets.

Is the cryptocurrency market now moving like the stock market?

The cryptocurrency market, like the stock market, has seen declines for several months, peaking last November, and with aggressive liquidity tightening measures by the Federal Reserve, all asset markets have since experienced significant declines.

Market experts note that the correlation between the traditional markets and the cryptocurrency market is probably at its highest since the inception of cryptocurrency trading, and if one goes down, the other is likely to follow suit or vice versa.

The correlation with the Nasdaq is at 0.82, higher than historical levels of less than 0.5 (on a scale of 0 to 1), said Silvia Jablonsky, CEO and chief investment officer of Defiance ETFs.

Both the traditional and stock markets are moving in similar directions more than ever, so there is an indirect effect on investor sentiment.

Experts also note a stronger correlation between cryptocurrency and technology stocks, which were among the hardest hit stocks in the recent market downturn.

What might happen next?

Is the cryptocurrency market heading towards the fate of Lehman Bank? Which is the largest investment bank that collapsed in 2008 and was a player in the financial crisis.

Market experts are of the opinion that this can never be acknowledged although there are potential signs now, but it doesn’t make much sense in the long run.

Read also:

Why has bitcoin fallen 55% over the past six months?

What determines the price of Bitcoin?

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