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What caused the latest cryptocrash?
In today's Sunday Special we talk about the latest cryptocrash.
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Some cryptocurrency billionaires have lost over half their wealth over the last weeks as skittish investors pulled their cash out of the notoriously risky asset. A sell-off wiped out more than $200 billion (€192 billion) from the cryptocurrency market in 24 hours alone as of Thursday, according to price-tracking website CoinMarketCap. But the wealthy aren't the only ones at risk.
The latest slump was driven in large by peculiar behavior from so-called stablecoins. Stablecoins are meant to hold a strong peg to an external asset, like gold or the US dollar. This makes them less price-volatile than other cryptocurrencies, like bitcoin, the world's most popular cryptocurrency, known for its big risk and big rewards. Backing by an external asset or an algorithm that controls the coin's supply keeps a stablecoin's price, well, stable.
Until it doesn't, that is. The promise behind TerraUSD, also known as UST, the world's third-largest stablecoin, was that it would always maintain parity with the US dollar.
At the time of publication, the coin's value has completely collapsed. This happened after massive withdrawals from Terra ignited fears that the coin would crash, causing even more traders to pull out. The world's largest stablecoin, tether, also briefly became unpegged, its price falling to less than $1 US.
Conspiracy or comeuppance?
Some in the cryptospace are speculating that it was an orchestrated attack to undermine the reputation of stablecoins. But cryptocurrencies are also grappling with the changing conditions of the global economy.
People in the cryptomarket are used to big swings. But the unusual economic environment we're now in is unnerving even traditional investors. Major stock indexes in the US saw a sell-off last week after the US Federal Reserve raised interest rates, part of its plan to combat spiking consumer prices.
In many countries, years of ultralow interest rates coupled with the government stimulus unleashed during the pandemic sent streams of cash flowing into riskier investments, like tech stocks and crypto. Now those initiatives are winding down, and the potential for inflation to weigh on economic growth has many seeking safer investments than they'd gone for in the past.
'Cryptowinter' is coming
Bitcoin has also fallen below the ever-important $30,000 mark, nearly hitting $25,000 on Thursday, a price it hasn't seen in 16 months. Over that time period, the world watched as electric carmaker Tesla added $1.5 billion worth of bitcoin to its balance sheet and the countries of El Salvador and the Central African Republic made the cryptocurrency into a form of legal tender. Companies like Starbucks and PayPal began accepting it as payment.
The explosion in the cryptoworld this week and the gradual decline leading up to it now have many talking about a potential "cryptowinter" setting in.
Risk for emerging markets
This is particularly concerning for emerging markets, like El Salvador, that have invested heavily in cryptocurrency. According to Bloomberg, the country, which has invested at least $105 million in bitcoin since last September, has lost around $40 million since March. That's more than El Salvador owes for its next foreign bond payment due in June.
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