Smaller Digital Coin Is To Blame: Crypto Crash Within Days: Confidence Shattered – Reason Named Luna
Cryptocurrencies are about to sell off: in just eight days, most have lost up to half their value. The culprit is the collapse of a smaller digital coin, which is shaking confidence in the crypto world – with consequences for stock markets as well.
Many cryptocurrencies have fallen sharply in value since early May and continue to fall daily. Bitcoin is worth 32% less today than a week ago. The second largest cryptocurrency Ethereum slid 36%, other bigs like Binance Coin (-41%) and XRP (-47%) lost even more.
Why is that?
The development is due to a cryptocurrency called Luna, which had a market capitalization of around 27 billion euros a week ago, but is now almost worthless. Their disappearance has shaken confidence in the crypto markets, which is why investors are also selling many other digital coins.
Why did Luna crash like that?
Luna is a cryptocurrency tied to another currency called TerraUSD. Both were brought to market by the American Do Kwon and his company Terraform Labs. TerraUSD is a so-called stablecoin whose value should hardly fluctuate. The Kwon Promise: One unit of TerraUSD can be exchanged for $1 of Luna Coins at any time. However, in early May, TerraUSD lost price stability for unknown reasons. As a result, Luna also lost value. At the same time, the case undermines confidence in stablecoins in general.
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What are stablecoins?
Stablecoins are cryptocurrencies whose value is predetermined. For example, there are stablecoins where one coin is always worth one US dollar. To guarantee this, the company that issues this stablecoin must have enough US dollars to be able to pay all crypto customers if necessary. Another way to ensure the price stability of a stablecoin is to use algorithms. Something like TerraUSD (UST) used. It works like this: one UST can be exchanged for one US dollar of Luna Coins at any time. So, if the UST slips below $1, investors have a buying opportunity. You can buy UST for less than a dollar, but get Luna Coins for a dollar – and make an instant profit.
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In theory, this mechanism should ensure that the value of an UST always fluctuates around one US dollar. Investors therefore like to use these stablecoins to park their money before investing it in other cryptocurrencies. However, the value of the UST slipped to $0.45 in early May. This suddenly made UST very attractive, but there weren’t enough Luna coins on the market to keep up with the demand. As a result, Terraform Labs broke its promise to always exchange UST for Luna Coins. With that, confidence in both currencies and the crypto market as a whole plummeted.
I have never heard of UST and Luna. Why is it so important that bitcoins also crash?
In October, all stablecoins combined had a market capitalization of $130 billion. They are therefore extremely important for the crypto world. The UST was the third largest of these stablecoins, with a market capitalization of around $14 billion, until its collapse.
The collapse of TerraUSD also raises suspicions about other stablecoins. The biggest – Tether – has long been accused of not having enough guarantees to ensure stability. However, since there is no regulator in the crypto world, this is difficult to verify independently.
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What does the crypto crash mean for other investments like stocks?
Some traditionally listed companies also make their money by trading cryptocurrencies. First and foremost, trading platforms like Coinbase . Their stock price was already plummeting anyway, but it rose again. On the Nasdaq tech exchange, the price fell to an all-time high of $58. Since the start of the crash, there has been a minus of 58%, which was also boosted by the weak quarterly figures that were announced during this period. However: the fewer cryptocurrencies traded, the less money the trading platforms earn.
MicroStrategy shares lost 54% . The US software maker began building reserves in bitcoin last year and paying its board of directors in cryptocurrency. Cryptocurrency-focused financial services firm Silvergate Capital and Galaxy Digital Holdings lost 45% and 47% of their stock value, respectively, while crypto-mining group Marathon Digital Holdings was down 44%.
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