Recent Crypto Meltdown- Explained
One bad apple and upcoming regulations have shaken the whole crypto market recently
Here’s what has caused the massive crypto crash that has caused investors to lose billions. Crypto has had a great run over the past few years. The pandemic got everyone interested in this supposedly “futuristic currency system.”
More so, even nations have accepted crypto.
But this crypto-mania may soon be coming to an end thanks to the recent crypto market crash which saw investors losing $200 billion in a day and $600 billion in a week.
But what’s caused this crash?
Shaky Stable coins
It all began with the crash of the twin crypto currencies Terra and Luna last week.
Both currencies fell over 99% losing almost their entire value. The crypto’s market value fell from $ 40 billion to $ 500 million in days.
Why? To understand this, we first need to understand how Terra and Luna work.
Terra is an algorithmic stable coin.
These are the non-volatile version of crypto currencies that, you guessed it, remain stable.
How do they remain stable?
They are linked to a real-world asset or currency, like the dollar. Companies that launch stable coins usually have dollar or other currency reserves equivalent to the number of their stable coins in circulation.
So, the price of Bit coin may fluctuate, but the price of these stable coins is expected to remain the same.
For instance, the price of Tether (a well-known stable coin that was also a victim of the crypto crash) promises to give you $1 every time you sell one Tether.
But algorithmic stable coins are different.
They aren’t backed by dollars but a complex mix of math’s and code.
Terra, for instance, is backed by a code that ensures you can always get $1 for a Terra when you sell it.
But unlike Tether it doesn’t give you that $1 directly.
It gives you $1 of Luna (its sister currency that operates on the same block chain) in return.
And the price of Luna isn’t fixed. It works just like other cryptos: it runs on faith.
So, you see, Terra isn’t all that stable.
And this instability is what caused the crypto to crash.
The Proverbial Slide….
Because of Terra’s complex underlying mechanism, the coin is very popular with traders.
You see, every time Terra’s value falls a little, people buy Terra and exchange it for $1 of Luna, earning extra money on each transaction. But despite this loophole, the system worked because Terra didn’t really plummet that much.
Until last week.
The Terra block chain also has a DeFi platform called Anchor. It incentivizes people to park their Terra on the platform, which it then loans out.
The depositors then get interest on their deposits.
About 14 billion worth of coins were deposited in Anchor in the beginning of May, but suddenly last week a large number of depositors withdrew their money from the platform, causing deposits to fall to $ 1.6 billion. This caused Terra’s value to fall way down and traders began buying the currency to exchange it with Luna.
In an effort to maintain Terra’s dollar pegs, the Luna Foundation Guard (the foundation which maintains Terra’s dollar peg) sold its reserves (which contained over $ 3 billion worth of Bit coin and other crypto) to pay back investors.
This massive sell-off spread like wildfire in the market, with the panic taking down the price of other cryptos.
Tether, which is one of the top three crypto currencies in the world, also lost its dollar peg, falling to $ 0.96 earlier this week before recovering. It still hasn’t reached the dollar mark yet.
This is despite the fact that Tether’s chief technology officer ensured that sellers were still easily getting $1 in exchange for the coin and the company had enough reserves to honour all transactions.
This just proves that stable or unstable all crypto coins run on faith.
Once panic sets in, nothing can save these coins.
And a widespread panic has set into the market not just thanks to this sell-off, but for multiple other reasons like the interest rate hike and the stock market crash.
To add fuel to this fire, Coin base recently announced that if it went bankrupt all of its users’ money would go down with the sinking ship.
The Exchange Muddle
Regulators have always been after crypto exchanges (and rightly so).
And looking at the current market volatility, regulators forced Coin base to accept publicly that if it ever went bankrupt it would not be returning their money. It would go towards paying off its debts.
This statement came along with a less than optimistic first-quarter earnings report, making crypto users extra careful.
And Coin base is not the only exchange in trouble.
Indian exchanges like WazirX and Coin Switch Kuber are also facing issues. You see, the National Payments Corporation of India recently made an announcement that it wasn’t aware of any crypto exchanges using UPI.
This indirectly could mean that no crypto exchange had secured permission to use UPIs.
As a consequence, these exchanges shut down UPI transactions. Some have even stopped accepting NEFT transfers or net banking as banks are also not cooperating with these exchanges until NPCI clarifies things.
Hence , users are moving away from crypto voluntarily or involuntarily.
And if more countries now introduce a safer Central Bank Digital Currency, it could be a death knell for a lot of speculative cryptos.
Does this mean crypto is over?
Nopes, Niyet, Not at all…
No matter how hard regulators try, ending the reign of cryptos like Bit coin and Ether is going to be nearly impossible.
Crypto will survive in one form or another, make no mistake about it.
Now only time will tell which cryptos make it and which one will disappear forever.