There was a virtual blood-bath in cryptocurrencies on Thursday. Investors were spooked by the crash in stablecoin Luna and the high inflation reading in the US. Ongoing turbulence in global equity, bonds and currency markets seems to have affected sentiments too. Most cryptocurrencies slid helplessly with bitcoin losing around 11 per cent, ethereum 20 per cent, dogecoin and polkadot losing around 23 per cent in just one session.   

This fall in prices has led to big erosion of investor wealth. Total cryptocurrency market cap declined from $1.4 trillion on May 11 to $1.18 trillion on May 12, decline of 21 per cent in just one session. 

Terra’s stablecoin UST losing its peg to the dollar and declining to a low of $0.30 led to widespread panic among investors. Explaining the crisis, Darshan Bathija, CO founder & CEO, Vauld, says, “Typically, most stable coins like Tether and USDC are backed by assets like cash and bonds; in the case of algorithmic stablecoins, like UST, they are supposed to be automatically pegged to the price of another digital asset. 1 UST can be redeemed or minted for exactly $1 worth Luna. Luna Foundation Guard (LFG), the non-profit foundation created to support the Terra Ecosystem, bought various cryptocurrencies including Bitcoin in order to maintain the stable coin’s peg.” 

“Earlier in the week, when BTC fell to $30,000, LFG’s reserves ratio to UST issued fell as well, forcing LFG to liquidate its BTC reserves.” 

Losing their lure 

Cryptocurrencies were among the favoured investments during the pandemic as many people working from home started trading in these assets. With these assets having no fundamental basis to their valuation, prices zoomed higher, simply led by higher demand. Bitcoin prices gained 300 per cent in 2020 followed by 59 per cent gain in 2021.  

But after hitting an all time high in November 2021, the total cryptocurrency market cap started falling and since then there has been no looking back. One of the main reasons for the reversal in sentiment was the  ban of cryptocurrency trading and mining in China which wiped out the crypto market by 40% in one month. This decline was further fuelled by the regulations and taxations brought upon cryptocurrencies in countries including India and the US.  

The Federal Reserve’s monetary tightening has further led to investors fleeing the cryptocurrency market. In the last one month crypto currencies have lost close to a trillion dollars in market cap from $2.16 trillion in April 2022 to $1.17 trillion in May 2022. Most of the top crypto currencies have been falling since the last week, losing more than $240 billion in the last 24 hours.  

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