Recent Crypto Market Turmoil

• The crypto market recently lost a staggering $600 billion in just one week.
• Bitcoin, the flagship cryptocurrency, plummeted below $30,000, which is less than half its peak value in November 20211.
• Other cryptocurrencies, such as TerraUSD (UST) and Terra (LUNA), suffered steep declines, with TerraUSD trading under $1 now.

Factors Contributing to Crypto Crashes

Market Correlation

Cryptocurrencies have been moving in sync with the stock market. The correlation between Bitcoin and the S&P 500 hit a 17-month high in March 2022, indicating that crypto and stock markets often move together.

Inflation Impact

While Bitcoin is often considered a hedge against inflation, recent events show that high inflation and tighter monetary policies can affect crypto investors as well.

Stablecoins Aren’t Always Stable

Stablecoins, which are supposed to maintain their value, can also face instability. For instance, TerraUSD (UST) lost its dollar peg due to the collapse of Bitcoin, affecting Terra (LUNA) as well.

Terra’s Unfortunate Situation

• Terra (LUNA) and TerraUSD (UST) are native tokens of the Terra network.
• TerraUSD aims to maintain its peg to the US dollar using algorithms.
• In an attempt to stabilize UST, Terra’s creator added Bitcoin to its reserve. However, this strategy didn’t prevent the collapse of Terra and TerraUSD when the stock market and Bitcoin crashed.

Remember

Cryptocurrencies are volatile assets, prone to significant price swings.

Systemic issues within the crypto space or macroeconomic factors (such as interest rates and inflation) can lead to crashes.