The combination of the rise in interest rates in the United States and the collapse of Terraone of the top ten cryptocurrencies with the largest capitalization, unleashed the perfect storm for the market.
Cryptos went through their worst week in 12 monthswith a collapse in the price of Bitcoin and other cryptoactives that led to more than US$500,000 being lost in the market and reaching minimum prices since 2020.
None escaped the dynamics of the rest of variable income assets, such as company shares, which have suffered for months -and this last week in particular- the change in monetary policy by the Federal Reserve (FED), which abandoned interest rates interest of 0% and announced a rise of up to 1%, with a view to increasing them in the coming months to curb inflation levels, the highest in 40 years.
In that sense, major company indices such as the S&P 500, Nasdaq, and Dow Jones They fell between 12 and 30% so far this year, due to the outflow of capital in search of less risky assets.
It is an answer to the end of “cheap money” in the world and a phenomenal rise in the shares of the world’s leading companies -more than 100% between 2020 and 2021-, driven by the record issuance of money due to the pandemic and which led to rising inflation.
However, to the headwind brought by the financial market was added the panic over the virtual disintegration of Terra, one of the most important ecosystems in the crypto market, which included a native token (Luna) and a stable currency or stablecoin (UST) which, together, were worth $50 billion just 10 days ago.
Today the value of both is just over US $ 4,000 million, according to data from Coinmarketcap.
“What we saw this week was a perfect storm. We came from two years of global crisis due to Covid, with high monetary issuance and low rates that converged in the crypto market and that, in my opinion, bottomed out this week,” he said. Télam Manuel Beaudroit, CEO of Belo, one of the most widely adopted Argentine exchanges among crypto users in the country.
The fall of Terra is fundamentally due to a massive run of money housed in UST, whose parity with the dollar was backed by the value of Luna and an algorithmic arbitrage mechanism between one and the other.
The mechanism allowed that, before a sale of UST, Moons were sold in the market to pay that “dollar” with new Moons, and vice versa otherwise.
Neverthelessthe loss of parity with the dollar for a few hours last weekend put its holders on alert, who had about 80% of the existing UST deposited in Anchor Protocol, a kind of bank that offered an annual return of 19.6% in exchange for these deposits.
This is how the so-called “death spiral” began: a massive sale of UST compensated by the issuance of Lunas not absorbed by the market, which collapsed its price and forced an even greater issuance to maintain parity with the dollar.
Consequently, Luna went from being worth $64 per unit last Sunday to less than 1 cent and UST to less than 20 cents this Sunday.
“What happened with Terra has an impact on the rest of the ecosystem because it is used to generate fear and uncertainty. One speaks of Ponzi schemes when it is important to distinguish between applications and projects that may arise,” said Beaudroit.
And he added: “It is not good to ensure performance or generate situations that, in some way, encourage people to think that they can have a high performance with security that is not such. That is why the important thing is the care of the consumer and the best The way to do it is with education. Make them understand that the decisions they make have an impact and they have to take responsibility”.
The question of whether a phenomenon like the one that happened with UST could happen with the rest of the stablecoins -USDT, USDC or DAI are the best known, whose capitalization is more than US$132 billion- was what completely shook the scheme.
Although they have different backup mechanisms – some with audited bank deposits that supposedly secure each unit in circulation with a fiduciary dollar, and others with a basket of cryptocurrencies that far exceeds their value in circulation – the fear that they would collapse also filled with fear. market panic.
Bitcoin, Ether, Cardano, XRP, Polkadot, Avalanche and other cryptos fell between 25 and 50% in the last ten days, reaching their lowest prices since the end of 2020 on Wednesday morning, at the height of the crypto crisis.
“The market has already suffered these volatilities. The big difference is that, in Latin America, more than half of those who have crypto for the first time bought it after the pandemic and have never experienced such a scenario,” Ignacio Carballo assured Télam. , teacher, researcher and consultant of “crypto and alternative finance” for American Market Intelligence (AMI) in the United States.
“Many did it to buy supposedly stable currencies and whose use case was not decentralization and going against the system, but to have a currency that would protect it from the inflation of the dollar. Today that is in check and we have to see if Those people who were encouraged to buy assets like UST, with which they lost a lot of money, will be encouraged to do so again in the future,” Carballo reasoned.
The scenario that unfolds now is the one that many had pointed out months ago: the end of the bull market that began in mid-2020 and the entry into a season of lower priceswhich will leave room for the survival of projects that really add value and usability.
“The interesting thing is to see how all this is going to recover. We still have to continue working on the product and on how to generate greater liquidity, market, infrastructure and applications for daily life,” concluded Beaudroit.
