If you’re curious about what caused the recent crypto crash, read on. Bitcoin‘s price has plunged 40 percent in the past five days. Then, a stablecoin called TerraUSD went bust. Meanwhile, the Fed has cut interest rates to combat an economic pandemic. Despite the ensuing chaos, Bitcoin-related stocks have surged in value. It’s hard to predict how far cryptocurrencies can fall in the coming weeks, but there’s a good chance they will continue to do so.
Bitcoin’s price has dropped 40 percent in the last five days
Cryptocurrencies like bitcoin have been on a rollercoaster ride this year. In the past six months alone, bitcoin has lost more than half its value. It peaked at $64,000 in November and has since dropped more than 50 percent. Last week, bitcoin was trading at about $30,000 after dipping as low as $26,000 earlier in the week. A rise in interest rates and inflation has contributed to the sell-off, but the extent of the fall may surprise some investors who bought bitcoin during the recent price run-up.
The recent price slump has wiped out all gains made on bitcoin. In the last five days, it has dropped nearly 40 percent from its all-time high near $69,000 in November. Other major cryptocurrencies like Ethereum have also dropped sharply, dropping 10 percent in seven days. This has led many to wonder if the bitcoin price will stay at this low level. In the meantime, cryptocurrency investors should take note of the price of other cryptos, as they could experience a similar fate.
TerraUSD, a stablecoin, imploded
The implosion of TerraUSD this week has raised questions about the viability of this cryptocurrency’s structure. Unlike Bitcoin, Terra’s UST stablecoin did not derive its value from traditional assets like gold or silver, and derived its stability instead from algorithms that tied its value to a sister cryptocurrency. As a result, the volatility of TerraUSD caught the attention of policymakers in Washington, who pressed the Treasury Department to enact rules for the stablecoin ecosystem. Ultimately, the Treasury Department issued a letter to Congress asking for rules for the stablecoin ecosystem, saying that these cryptocurrencies present the same risks as bank runs.
In the wake of the TerraUSD crash, many industry insiders have called for stronger regulation of stablecoins. Several “very viable” legislative proposals are currently on the table, according to Circle CEO Jeremy Allaire. But despite the crash, many observers remain cautious. The company’s CEO explains that the crash only serves to increase the need for stronger crypto regulation. He noted that the TerraUSD meltdown acted as fuel for lawmakers to move quickly and enact new laws.
Fed cut interest rates to deal with pandemic-driven economic slump
The U.S. Federal Reserve is taking unprecedented action to combat an economic slump brought on by the Zika virus. It is increasing its balance sheet by almost $3 trillion, buying mortgage-backed securities and U.S. Treasury securities to increase liquidity in the market and inject cash into the economy. The Fed also introduced a temporary lending facility called the Main Street Lending Program. The action could help revive the economy and prevent further damage from the virus.
The Fed has reduced its benchmark interest rate, or prime lending rate, to near zero, in an attempt to combat the effects of the coronavirus. The move comes after the FOMC has purchased $700 billion in bonds and notes to spur lending. The Fed says it will maintain this low rate until the economy shows signs of recovering. The rate is a key indicator of the health of the economy, and lowering it will encourage more spending.
Bitcoin-related stocks have risen in valuation
While the crypto markets have followed the stock market in recent weeks, the recent price slump in Bitcoin and Ethereum has been largely due to the lack of mainstream adoption. However, the same factors that are affecting stock markets are also impacting the crypto markets, including geopolitical issues, rising inflation, and worries about tighter monetary policy. The U.S. Federal Reserve is expected to hike interest rates this week, which has led to a sharp selloff in U.S. stocks and bond prices.
The recent crash in the cryptocurrency market has wiped out around $600 billion in the market’s digital assets. While this may not be good for stocks, the pain caused by the bitcoin price drop may have helped some Bitcoin-related stocks rise in value. The recent volatility in the price of Bitcoin has also boosted the market for other risk assets. According to Katie Stockton, a co-founder of Fairlead Strategies, “Bitcoin’s price is directly tied to the value of the terra cryptocurrency project,” which was once valued at $50 billion.