2022 has been quite the rocky ride so far – the lingering effects of the pandemic, soaring inflation, sky high interest rates, the heaviest pain we’ve felt at the pump, a tumbling stock market, ongoing geopolitical turmoil abroad and not to mention civil unrest on the domestic front… and, of course, crypto taking the biggest plunge ever, wiping out trillions in market cap and overnight crypto millionaires.
As the summer months get warmer, it will only get colder in this crypto winter as cryptocurrency prices continue to drop to their all time lows.
source: Artur Widak | NurPhoto | Getty Images
It was inevitable that the bubble would burst at some point, and all the aforementioned events brewed up the perfect storm – but the single, unforeseeable event that catapulted it all to completely avalanche was the collapse of the stablecoin TerraUSD in May.
What is a stable coin?
Cryptocurrency is highly volatile, but stablecoins aren’t supposed to be. These coins are pegged to fiat currency like the USD (meaning they can be exchanged for the dollar because it’s linked to actual reserves) and allows cryptocurrency traders to “hedge against spikes or to store idle cash without transferring it back.” Stablecoins can also be decentralized and not backed by reserves, like TerraUSD which is “maintained by a complex mechanism involving swapping TerraUSD coins with a free-floating cryptocurrency called Luna to control supply.”
Like Ethereum is a blockchain that produces Ether tokens, Terra is its own blockchain producing Luna. To create TerraUSD and control the supply so that its value is pegged to the USD, Luna would need to be burned if the value went below the dollar. You can read more here on how this works here.
The catastrophic implosion
On May 7, over $2B worth of TerraUSD was unstaked and hundreds of millions sold, unpegging the price down to 91 cents. Traders took advantage of the price arbitrage exchanging 90 cents of TerraUSD for $1 of Luna. However, because only $100M worth of Terra can be burned for Luna per day, it pressured investors to a widespread panic sell. This dropped the stablecoin all the way down to 20 cents and the value of Luna tokens nearing zero, causing cryptocurrency exchanges to delist it.
Terra once had a market cap of over $40B and all that value literally evaporated overnight. This caused a domino effect as people got scared and lost faith, causing all cryptocurrencies to take a steep dive. BTC and ETH are currently worth around 1/3 to 1/4 of their November peak.
Survival of the fittest
What now? Now we’re in hibernation mode and patiently riding it out. No one knows for certain how long. Is it a good time to be bullish and buy low or will crypto continue to fall? No one knows. What we do know is we’re living through another cycle:
From all the hype and excitement last year when prices were surging…
to fear when they were starting to drop in the last month…
to now frustration as the drop continues to financially ruin individuals and companies…
to what will come next is silence as people exit and things die down.
We will continue to witness the death of many companies (mostly startups) that couldn’t survive the cold. And all those get rich quick schemers and scammers that came out of the woodwork will return back into the woods without a trace. The critics will believe they have spoken and move on to the next thing to criticize.
The true builders and believers of Web3 will continue to relentlessly work through it all and know it’s a long term game– it always has been. Things will only get worst before they get better.