In early April, enthusiastic enthusiasts and blockchain superstars gathered at the Bitcoin Conference in Miami to party, celebrate their successes and shout out the crypto skeptics. Today, crypto investor forums publish numbers of suicide hotlines. How did we get here?
As they become more popular, cryptocurrencies behave more and more like traditional stocks by following the trends of the US financial markets. However, with the stock market in dire straits, mainstream cryptos like bitcoin and ethereum followed the Nasdaq in its fall.
Only, despite their democratization, these digital currencies have kept their highly volatile aspect and remain subject to sudden declines. Bitcoin’s value has thus fallen below its July 2021 level, the last major crisis to date, and could continue to fall.
The problem is that bitcoin is by far the largest player in cryptocurrency and therefore takes down other currencies as well as satellite companies. Coinbase, the largest crypto exchange platform, has come to a complete standstill. In a few hours, the CEO saw his fortune increase from 13.7 to 2.2 billion dollars (from 13.2 billion euros to 2.1 billion euros).
Most crypto billionaires have had the same treatment. Investor Michael Novogratz lost three quarters of his $8.5 billion (8.2 billion euros). But the most impressive meltdown is undoubtedly that of the wallet of Changpeng Zhao, the CEO of Binance, which fell from 96 to 11.6 billion dollars (from 92.2 to 11.1 billion euros). That’s a drop of about 88%. When these crypto figureheads have a few billion left to wipe their tears, the situation is sometimes dramatic for more modest investors.
To make matters worse, the situation is such that even “stablecoins”, cryptos specifically designed not to be subject to sudden market swings, are breaking loose. 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 currency, Luna, which fluctuates according to 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 dollar of Luna. So if the UST is worth 99 cents, it is possible to exchange it into Luna for 1 dollar and immediately make a profit. Thus, the demand for UST increases mechanically and returns to 1 dollar. This is called arbitration.
Only a panic on the platform where Luna is exchanged caused the currency to fall by 96%. Thus arbitrage began to slip and the UST, a supposedly stable value, also fell significantly, reaching 60 cents on Wednesday, May 11.
However, Terra Luna relies on a huge supply of bitcoins amassed by its developers in the event of a crisis. The problem is that if some of these bitcoins are used and hit the market, they could help drive the currency even deeper than it currently does.