Spring is a season that usually alters human behavior. It is said to be the season of love, adventure, and blossom. However, the emotions of seeing the first flowers bloom after a long winter were overlooked by the folks in the crypto market.
On Monday 9th, Bitcoin dropped to its lowest interest in 2022, below $30,000. The conference rooms were altered, the online meetings filled with loud voices on the computer screens, and phones were refreshed constantly in need of a hopeful update. “What is going with the crypto market?”. The spring brought new flavors to the season, but they were bitter.
But before telling the story about the appearance of the big bad bear on the market, we must take a scalpel and dissect the monster: Why did the market crash? And more importantly, what will happen now?
Icarus is flying too close to the sun
Bitcoin started the second quarter of the year 2021 on a very strong note. In fact, on the 10th of November, it reached its higher value of all time, above the $68,000 mark. However, the volatile market had already suffered a lot of fluctuations during the year, getting above $60,000 in April and dropping below $30,000 in July.
Circles in the market are normal and often linked to different circumstances related to the economic state of the world, as well as other considerations linked with social and historical events. And while the crypto market was once a niche space for investors that flourished during the COVID-19 pandemic as a hedge against inflation, the truth is that currently, the stock market has intertwined with the cryptocurrencies. Both markets are moving in similar directions, and even experts are observing a strong correlation between cryptocurrency and tech stocks.
However, the circle of ups and downs in the crypto market can have a certain pattern within the chaos. Prices are usually a lagging indicator of performance but in the crypto space they are a major indicator. The chaos of ups and downs usually drive interest from the public and therefore solutions are provided to keep the boats sailing. The result is that creativity and innovation work hand in hand to provide new ways of facing crises, and in today’s internet era the cycles usually last short times, propelling major ups after a period of bear market .
A day to remember
On the Monday of the tragedy, in those messy rooms full of unfinished coffees and maniac investors, some were still able to keep their calm and take the news with caution, reflecting on what was the main reason for the rapid crash.
The conclusion was that two main factors drove the bear market: moves by the U.S. Federal Reserve to combat high inflation, and the crash of the terraUSD, a stablecoin.
The tale of the Fed controlling inflation was a silent death creeping into the markets since 2020, when due to the pandemic, the cut of interests generated high inflation that ended up like a big snowball affecting the stock markets, along with the cryptocurrency ones. Abundant liquidity also drove prices up as traders invested their money anticipating stronger returns.
Seeing the bubble about to pop, the Fed decided in May to raise interest rates by half a percentage point. The silent thread of inflation like a wild horse about to be captured made investors very nervous. The result was that the cryptocurrency market lost its peak from around $3 trillion in November to $1.3 trillion now.
The cherry on the pie was the crash of TerraUSD (UST) and its direct damage to its sister token, luna. This blockchain project used luna as a collateral currency to UST, resulting in a total crash and a point of no return for them by the dreadful and scary Monday.
A reflection on stablecoins
The bear market also leaves a space to reflect on the considerations of stablecoins and how the crash of TerraUSD was cooked over time. But first, it’s necessary to point out what exactly is a stablecoin.
A stablecoin is a coin in the crypto space that aims to provide safe digital assets that maintain a stable valuation. The goal for the stablecoin is to maintain the same value as its peg so it’s an alternative to the high volatility of the most popular cryptocurrencies like Bitcoin.
With a dollar peg, one stablecoin should always be valued at one dollar, no matter what’s happening in the market.
The value of the UST token is pegged to the U.S. dollar, which means that at all times the value of one UST should be $1. If the value plunges below a dollar then the coin could be “burned” and exchanged for a dollar’s worth of Luna.
Luna started trading in 2019 at $3 and reached its peak at $116 in a down period for other popular cryptocurrencies. Back then, nobody could see that Luna was starting its race to the bottom of the wheel.
During the first week of May, UST broke the peg against the dollar and the value fell to less than a dollar causing panic and a brutal blow for the coin, damaging Luna’s liquidity and generating a total crash by the end of the week.
One of the main reasons for the complete burn of the coin was its operational mechanism based on a complex algorithm that, using the help of Luna, maintained its value against the dollar.
Despite being a stablecoin, UST proved that the volatility of the market is beyond any safeguards or limitations. Advisors are now concerned about other stablecoins like Tether (USDT), the third-largest cryptocurrency by market cap and also linked to the US dollar, especially considering that during the market crash it dipped to $0.97, briefly losing its peg. It has since rebounded, but its future is questionable.
In addition, the Fed’s concern over stablecoins keeps increasing as they currently represent 15% of the total cryptocurrency market and its uncertainty can ultimately affect the traditional market.
So, what now?
As the bear still isolates the market, there are some signs that the hibernation won’t last forever.
Firstly, because it is not the first time the market has crashed. It also suffered major crashes in 2013 and 2017 and both years, it took a quick speed into recovery. Many analysts feel like this will also be the case of the new bear market and as soon as the world reverts from the global economic meltdown, the market will be back on its track. The world is still not familiar with the crypto market patterns that do not correspond with the traditional markets. At the end of the day, crypto moves a lot faster today than equities did in the 1980s, which means a fast cycle of growth as the seasons go by.
Bitcoin is slowly recovering as investors see it as the safest option in the market, ditching alternative coins and other risky assets. If the current trend continues, it may rise above the $31,000 level, proving that despite a major fall, it will remain strong and follow the predictions of many experts that foresee its price to rise above $100,000 in the future.
The crash of UST also serves as a lesson for investors, as many jumped in the wagon without considering how its system worked. It also sets a new framework for approaching cryptocurrencies and a better understanding of the market fluctuations, preparing investors for the next future crisis.
