- The crypto market is facing a crisis of confidence following the implosion of Luna and Terra.
- Crypto investors often point to stablecoins as essential to the growth of the sector, but now some are questioning their viability.
- The crypto bear market highlights just how precarious the $1.2 trillion (R19 trillion) sector is as it relies on the hope that others will drive prices higher.
- For more stories, visit www.BusinessInsider.co.za.
There is a crisis of trust rocking the cryptocurrency market following the implosion of Luna and its related stablecoin Terra, and a lack of trust is spreading throughout the ecosystem.
Terra de-pegged from $1 (R16.00) earlier this week and is now trading at around 50 cents (R8.00) as the algorithmic stablecoin wiped out over $5 billion (R80 billion) in market value virtually overnight.
Stablecoins are simply meant to hold their value and remain liquid to facilitate trading in other cryptocurrencies. But the destruction of Terra shows that stablecoins can have all the risk of cryptocurrencies without their upside potential.
The value destruction at Luna was even worse as it lost $30bn (R485bn) in market value after declining by 99% over the past week.
Now, some crypto investors are waking up to the fact that the value of what they own depends solely on the dynamics of supply and demand, hoping to be able to sell the coins to someone else at a higher price in the future. But that hope is of little comfort when cryptocurrencies are in a full-fledged bear market, having wiped almost $2 trillion (R32 trillion) in value since their November peak.
Unlike stocks, cryptocurrencies do not have an underlying stream of earnings that investors can assess, project into the future, and value based on proven strategies like discounted cash flow models. Instead, crypto investors can only hope that trust in the sector is restored and adoption continues to advance, driving more demand for what they already own.
That may be difficult as the implosion of the Terra stablecoin is likely to trigger intense scrutiny from regulators in the coming months. It’s also tough because Terra’s steep decline has spilled over into the world’s largest stablecoin, Tether.
Tether is worth over $80 billion (R1.3 trillion) and briefly saw its value drop below $1 (R16.00) and fell 5% to $0.95 (R15.35) on Thursday. Many investors have questioned whether Tether reserves are actually invested in liquid, zero-risk securities like US Treasury bonds.
Tether’s stability is essential to restore confidence in the cryptocurrency market, and Thursday’s performance is not a good sign. Another issue facing crypto investors is whether the implosion of Terra and the weakness of Tether pose a systemic risk to crypto markets and financial markets in general. If it does, regulators could come down hard on the sector, which has largely been left alone since Bitcoin was introduced in 2009.
For a market that relies solely on the dynamics of supply and demand, it is crucial that the cryptocurrency market cleans up quickly and restore investor confidence; Otherwise, the waterfall seen on Terra and Luna this week could spill over to other cryptocurrencies.
And restoring trust in the crypto market could be difficult given its decentralized nature, once again highlighting why trust between its users and investors is crucial in driving future price appreciation.