Stablecoin Terra USD crash beats up the value of cryptocurrencies; What’s next?!

Singapore-based Luna Foundation Guard has said it spent billions of dollars’ worth of Bitcoin and other cryptocurrencies this month in its unsuccessful attempt to uphold the peg of collapsed stablecoin Terra USD (UST).

Luna Foundation Guard (LFG), the association formed to defend and support the decentralized token and the Terra blockchain revealed, that its Bitcoin reserves dropped from more than 80.390 to only 313 bitcoins in less than 10 days. In dollar terms, the value decreased from 2.5 billion U.S. dollar to a meager 10 million US dollar in 10 days. The collapse of the UST stablecoin sparked a panic in the crypto market. The UST stablecoin – which is usually expected to be worth 1 dollar – dropped below 0.20 dollar. Meanwhile, the Luna token that is intended to serve as a shock absorber for UST’s algorithmic dollar – pegging mechanism, plummeted to 0.002 dollar from 80 dollar.

Stablecoins, which are pegged to the value of traditional assets such as the US dollar, are usually popular in times of turmoil. They are in our opinion key elements of the cryptocurrency market and traders park funds in these assets as they move in and out of other digital tokens.

The world’s biggest stablecoin, Tether, also briefly lost its 1:1 peg during a trading session but recovered shortly. On the same day, Bitcoin – the world’s largest cryptocurrency – dropped to 25,400 dollar, its lowest level since December 2020. Bitcoin divides people in our opinion like no other investment. While some will be mourning their losses after this month’s cryptocurrency crash, others will be celebrating what they hope will be an end to this pointless distraction. All, however, will be wondering what happens next. Bitcoin fans will be hoping that this month’s blistering sell-off is only a temporary setback and wondering whether they should take the opportunity to buy more in the hope of cashing in on equally significant recovery. Critics of cryptocurrencies might be feeling vindicated, but they could also be quietly wondering if they should buy some Bitcoin, just in case.

So you might be wondering as well at what we are looking at today – the actual death of Bitcoin or an unmissable buying opportunity?

Even by its volatile standards, the crypto world in our opinion has gone crazy, Bitcoin is down some 60% from its record high, falling from 67,000 dollar last November to a low of below 26,000 dollar this month, with Ether, BNB, XRP, Cardano, Solana, Terra’s Luna and others also in meltdown. The cryptocurrency sector has lost 1 trillion dollar in market capitalization and, at the time of writing, is valued at 1.3 trillion dollar. And there could be worse to come by not underestimating the sentiment of markets. Could this be the start of a long-term bear market for crypto and other financial assets? Or is it just the chaotic combination of interest rate hikes, fears of an imminent recession and military conflict in Europe. Bitcoin is currently not the only high-profile victim of these wider trends. US technology stocks, the other great growth story of the post-financial crisis era, are also in meltdown. New York’s tech – heavy NASDAQ index is down about 30% this year – and in our opinion the same forces are at play.

More than a decade of near – zero interest rates and multitrillion-dollar stimulus out of thin air has inflated asset bubbles everywhere but the era of easy money is in our opinion now finally over, as the US Federal Reserve (Fed) increases interest rates and slashes stimulus in a belated attempt to curb today’s raging inflation. Yet the cryptocurrency market has in our opinion issues of its own. The collapse of the Terra USD stablecoin hit sentiment and in our opinion hastened the flight from the digital tokens. Other factors driving the decline include worries about regulation and security breaches. The spate of cryptocurrency fraud cases has in our opinion further undermined confidence.

The recent crash is also a tough pill to swallow for younger investors who have taken big risks to gain exposure. Interactive Investor research shows that cryptocurrency is the investment of choice for 45% of people aged between 18 and 29. An alarming number have funded this through credit cards and other form of credit, leaving them with a double whammy of investment loss and debt, made worse by rising interest rates. However, they believe they do have one hope – we have been here before. Crypto evangelist will most probably point out that the market has fallen before then skyrocketed to record highs, but as interest rates rise and the economy slows, we are by no doubt in a different world today.

Bitcoin in our opinion has yet to prove that it offers the world a killer application it can’t get elsewhere and, given that most investors do not really understand how it works, its price moves are still largely driven by sentiment, whether positive or negative. Right now, it is negative. Confidence is obviously shaken and people are in no mood to take on risk. So we at Calvin•Farel expect, even when we see periods of relative calm, it does not last long.

On the other hand some big players could take advantage of the recent dip, which will increase volatility and larger price swings. As Bitcoin has survived corrections of 70% to 80% in the past, this may be an opportunity for institutions to build or increase positions at better levels. Recent events appear to have cleared up one myth about Bitcoin – that it is now digital gold – a safe haven in a crisis. Instead, it has correlated rather too closely with stock markets, piling on the risk rather than adding protection. But Bitcoin is not alone in this. If we look at gold and Forex markets, there are no signs of any serious haven demand. The likes of the Japanese yen and Swiss franc have also shown no strength whatsoever.

Gold, silver and cryptocurrencies are struggling because they do not pay any interest or dividends, making them poor inflation hedges. All three are priced in US dollars and the surging value of the greenback has made them relatively more expensive for those buying in foreign currencies, making them even less appealing. We are expecting to see bounces here and there, but as long as government bond yields are on the rise and the dollar is in an uptrend, the risks in our opinion remain skewed to the downside. It is difficult to see how cryptocurrencies could bottom out given these facts and today’s poor economic fundamentals. It requires in our opinion a recovery of the general sentiment before we see an improvement.

Traditional investment advice is to keep your nerves in the middle of a crash and avoid crystallizing your paper losses by selling up in a panic. That has worked pretty well with shares, as history shows stock markets have a habit of recovering over time. However, one thing has not changed: don’t invest money you cannot afford to lose.