Crypto Crash

Stocks and bonds aren't the only markets selling off these days. Cryptocurrencies and other digital assets have been plunging even more. So much for the digital-gold, uncorrelated-asset, electronic store-of-value thesis for Bitcoin and its peers.

Instead, cryptocurrencies have been trading just like other momentum-driven, risky assets. Interest rates are going up, economic uncertainty is on the rise, and securities that don't have solid fundamentals or generate an attractive yield just aren't in demand these days.

The crash in digital assets has wiped away some $600 billion in market value in just a week, Barron's crypto reporter Jack Denton writes.

Bitcoin dipped as low as $25,000 in today's trading, before recovering to about $29,000 by this evening. That's still down about 25% over the past week and well off Bitcoin's record high of nearly $70,000 about six months ago.

Ether, the second-largest crypto, fell as low as $1,700 today, versus its November peak around $4,700. Smaller altcoins—like Solana, Cardano, and Avalanche—and so-called "Memecoins”—like Dogecoin and Shiba Inu—have been hit even harder.

Even stablecoins like Tether, which are meant to be pegged to government-issued currencies like the U.S. Dollar and backed one-to-one by real assets, have lost significant value. Another "algorithmic" stablecoin called TerraUSD dropped as low as 23 cents on the dollar earlier this week.

Jack dove into the world of stablecoins in a feature published today. He wrote:

Bitcoin’s high volatility and drawbacks as a system for peer-to-peer payments opened a door for stablecoins. The coins have become a prime medium of exchange for payments, trading, lending, and other activities based on blockchain technology. “Today, stablecoins account for the vast majority of transaction volume in cryptocurrency markets,” says Clara Medalie, head of research at digital assets data provider Kaiko.

While stablecoins represent just 12% of the $1.4 trillion total market cap of cryptocurrencies, they make up the vast majority of trading volume, according to CoinMarketCap. Demand for stablecoins is so high that yields top 8%—and even touched 20% for TerraUSD.

Algorithmic stablecoins like TerraUSD differ from Tether in that they maintain their peg by allowing traders to swap for other cryptocurrencies also worth a dollar—in TerraUSD's case its sister token Luna. When TerraUSD's price fell below its $1 peg, traders would swap the stablecoin for Luna, removing TerraUSD from circulation and reducing supply. That would boost the price back toward $1. And vice versa when the price of TerraUSD rose above $1.

That model worked until it didn't—this past week—with implications for other cryptocurrencies. Jack wrote:

The pressure on TerraUSD began with a $350 million sale of the stablecoin that flooded the market. The pressure accelerated as deposits of TerraUSD on a DeFi platform called Anchor fell by about $10 billion.

“I understand the last 72 hours have been extremely tough on all of you—know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” [crypto entrepreneur Do] Kwon said on Twitter on Wednesday. “As we begin to rebuild [Terra], we will adjust its mechanism to be collateralized.”

Still, the Luna Foundation may be running out of money. Its reserves have dropped to less than $100 million worth of cryptos, and it now holds no Bitcoin in its wallet.

Luna’s stockpiling of Bitcoin created mechanisms for contagion across other cryptos and trading platforms, which clearly couldn’t handle a run on TerraUSD. Traders expecting a meltdown in TerraUSD appear to have sold Bitcoin, contributing to the token’s declines. That, in turn, spread throughout crypto markets, pressuring tokens like Ether and sparking withdrawals from DeFi platforms.

The plunge in TerraUSD has directly wiped out more than $29 billion in value, and contributed to the overall market's declines.

Read the rest of Jack's reporting here.