To understand why the Crypto Market is down, let’s first look at two fascinating data points. The first data point is about stock performance, or more precisely, the equity performance of India’s top equities. These are India’s top publicly traded corporations. And you can see that strong stocks like HUL, HDFC AMC, HDFC Bank, and many others have corrected dramatically over the last six months. Let us now look at the second data point. This is from the US markets. Firms such as Amazon have corrected by roughly 40% in the last six months, and companies like Apple, which is one of the most consistent stocks ever, have also corrected by 15%.
And if you look farther down the scale, companies like Netflix or Zoom have been smashed by roughly 70%. Something similar has happened when you try to tally these statistics with the Crypto Market. It’s not like the Crypto Market is acting strangely. For example, Bitcoin has dropped nearly 50% in the last six months, equal to the drop in US tech equities. So that is a fact. However, there is a widespread worry due to Terra Luna’s changing status.
To understand what exactly went wrong with Terra Luna, we need to understand ‘Stablecoins’. Like any new asset class, crypto assets are volatile and, therefore, are pegged against Stablecoins. Stablecoins, as the name suggests, are designed to be consistent MMCrypto. Most stablecoins are strongly linked to a traditional fiat currency, such as the USD, or a commodity like ‘gold’. Investors purchase them in order to store money and facilitate transactions within the crypto ecosystem.
So, in the case of Terra Luna, it was pegged against the stable coin ‘UST’ or TeraaUSD, which was designed to stay pegged at $1 and bottomed out at 13 cents. Therefore, the Luna coin saw a huge crash.
Reportedly, what happened was that big parties had access to a large amount of UST (in exchange for Bitcoin) all at once, which changed the equation of UST to $1. One UST had to equal one dollar in the equation. However, this access gave the power to the big parties to change the equation. They bulk- sold these UST, and on 9th May, 1 UST became $0.68 before finally bottoming out at 13 cents. This became an opportunity for other big wheels to jump into the fray and start exploring some arbitrage opportunities, which resulted in the failure of Terra Luna. Since May 9, 2022, the Terra blockchain has been officially suspended, and UST has been de-pegged from the US dollar.
The most crucial question now is why did other major crypto assets such as Bitcoin and Ethereum plummet? The simple answer to this is that Bitcoin works as a sentiment driver in the crypto world. As a result, many investors in the crypto business are panicking. They are selling their cryptos because they invested without knowing why they did so in the first place. Fundamental investors, on the other hand, who believe in this asset, are still staying invested.
Another reason why Bitcoin is falling is due to arbitrage opportunities. People perceive this as an opportunity to short the crypto market, thus they are shorting Bitcoin. However, one ‘Satyam’ scam did not break the stock market, similarly, one Terra Luna breakdown will not give way to the entire crypto ecosystem.
The big question is whether you should continue to invest?
From a macro perspective, bitcoin price movements resemble those of growing tech equities. So, if firms like Netflix, Zoom and others have suffered significant losses, Cryptos are definitely not sticking out like a sore thumb. So, be smart, do your due diligence, and know that cryptos are here to stay.
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I’m a Cryptocurrency Author and I have been writing about Cryptocurrencies for over 2 years now. I have written many articles on the subject and have been interviewed by some of the biggest names in the industry. My work has been featured on major publications such as Forbes, CoinDesk, and more. I am passionate about Cryptocurrencies and believe that they have the potential to change the world. I am always looking to learn more about this fascinating industry and share my knowledge with others.