Huge Panic and Soaring Fortunes: Cryptos are Crashing

Huge Panic and Soaring Fortunes: Cryptos are Crashing

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In early April, blockchain enthusiasts and superstars gathered at the Bitcoin Conference in Miami to party, celebrate their successes, and shout out crypto skeptics. Today, crypto investor forums post suicide hotline numbers. How did we get here?

As they become more popular, cryptocurrencies are behaving more and more like traditional stocks following the trends of the American financial markets. However, with the stock market in bad shape, mainstream cryptocurrencies like bitcoin and ethereum followed the Nasdaq in its decline.

Only, despite their democratization, these digital currencies have retained their very volatile aspect and are still subject to flash crashes. Thus, the value of bitcoin has fallen below its July 2021 level, its last major crisis to date, and could continue to fall.

The problem is that bitcoin is by far the biggest player in cryptocurrencies and therefore drags down both other currencies and satellite companies. Coinbase, the largest crypto exchange platform, has completely stalled. In a few hours, his CEO saw his fortune increase from 13,700 to 2,200 million dollars (from 13,200 million euros to 2,100 million euros).

Most crypto-billionaires have been through the same treatment. The investor Michael Novogratz thus lost three quarters of his 8,500 million dollars (8,200 million euros). But the most impressive disaster is undoubtedly that of the purse of Changpeng Zhao, the CEO of Binance, which went from 96 to 11,600 million dollars (from 92.2 to 11,100 million euros). That’s a drop of about 88%. If these cryptocurrency figureheads still have a few billion to dry their tears, the situation is sometimes dramatic for the most modest investors.

collective diving

As if that were not enough, the situation is such that even “stablecoins”, cryptos specially designed not to be subject to sudden market fluctuations, are unscrewing. This is the case with Terra (UST), a very popular cryptocurrency, which is supposed to follow the movements of the dollar.

Terra is backed by a sister coin, Luna, which fluctuates based on supply and demand. The principle is that when the UST deviates from the value of the dollar, it can still be exchanged for the equivalent of 1 Luna dollar. Thus, if the UST is worth 99 cents, it is possible to exchange it for 1 dollar in Luna and make an immediate profit. Therefore, the demand for UST mechanically increases and returns to 1 dollar. This is called arbitration.

Only a panic on the platform where Luna is traded caused the currency to fall by 96%. Thus, the arbitrage began to slide, and the UST, a supposedly stable value, also fell significantly, reaching 60 cents on Wednesday, May 11.

However, Terra Luna has a huge reserve of bitcoins accumulated by its developers in case of crisis. The problem is that if some of these bitcoins are used and make it to market, they could help boost the currency even more than it currently does.

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