Cryptocurrency market in turmoil – World Socialist Web Site

The cryptocurrency market was thrown into turmoil last week as the market value of bitcoin, the most widely used cryptocurrency, continued to fall and so-called “stablecoins” are collapsing.

An advertisement for Bitcoin cryptocurrency is displayed on a street in Hong Kong, Thursday, Feb. 17, 2022. [AP Photo/Kin Cheung]

The use of stablecoins has increased over the past two years because they are supposed to provide some protection against the wild swings in the cryptocurrency markets, above all for bitcoin which has experienced several plunges in its history.

Stablecoins have been likened to chips in a gambling casino. They can be used to buy cryptocurrencies without the use of government-backed currencies, principally the US dollar, enabling the user to make more rapid transactions. Deals involving regular currencies often take days to complete.

Stablecoins are supposed to provide a degree of security because they can be cashed in, like a chip in the casino, at their face value, dollar for dollar.

There are two types of stablecoin: those that are backed by holdings of financial assets, including cash, government bonds, corporate debt and those that seek to maintain their dollar-for-dollar peg through financial engineering based on the use of algorithms.

But last week one of the latter type, TerraUSD and its associated stablecoin, Luna, collapsed. According to the Wall Street Journal (WSJ) their demise “saddled investors with billions of dollars in losses and ricocheted back into other cryptocurrencies.”

Seven days ago, Luna was trading at $ 81. It is now worthless, and Terra has been delisted from major exchanges meaning it is effectively finished after once being valued at $ 40 billion.

The Financial Times (FT) reported that, according to the research firm, CryptoCompare, the Luna episode was “the largest destruction in this amount of time in a single project in crypto’s history.”

Another trader and enthusiastic supporter of crypto told the FT Luna’s failure was “one of the greatest catastrophes crypto has ever seen” and a “real wake-up call” that it is possible crypto prices can fall to zero.

The FT commented that while Terra’s demise was not systemic to the broader crypto market, it had far-reaching implications.

“What matters more is that the episode has renewed concerns potential cracks in other stablecoins, including the biggest of them all, Tether, calling into question the foundations behind the crypto industry.”

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