What will happen in the market after the fall of Bitcoin?

The combination of the rise in interest rates in the United States and the collapse of Terra, one of the ten cryptocurrencies with the largest capitalization, triggered the Perfect storm to the market.

Cryptocurrencies experienced their worst week in 12 months, with a collapse in the price of Bitcoin and other crypto assets that led to more than $500,000 being lost in the market and hitting the lowest prices since 2020.

None escaped the dynamics of the rest of variable income assets, such as company shares, which have suffered for months -and this last week in particular- the change in monetary policy by the Federal Reserve (FED), which abandoned interest rates interest of 0% and announced a rise of up to 1%, with a view to increasing them in the coming months to curb inflation levels, the highest in 40 years.

Cryptocurrencies experienced their worst week in 12 months, with Bitcoin trading crashing

In this sense, the main indices of companies such as the S&P 500, the Nasdaq and the Dow Jones fell between 12 and 30% so far this year, due to the outflow of capital in search of less risky assets.

It is a response to the end of “cheap money” in the world and to a phenomenal rise in the shares of the world’s leading companies – more than 100% between 2020 and 2021 – driven by the record issuance of money due to the pandemic. and that led to rising inflation.

However, to the headwind brought by the financial market was added the panic by the virtual disintegration of Terra, one of the most important ecosystems in the crypto market, which included a native token (Luna) and a stable currency or stablecoin (UST) that, together, were worth US $ 50,000 million just ago diet days.

Today the value of both is just over $4 billion, according to data from Coinmarketcap.

“What we saw this week was a perfect storm. We came from two years of global crisis due to Covid, with high monetary issuance and low rates that converged in the crypto market and that, in my opinion, bottomed out this week,” he said. Télam Manuel Beaudroit, CEO of Belo, one of the most widely adopted Argentine exchanges among crypto users in the country.

why did terra fall

The fall of Terra is fundamentally due to a massive run of money housed in UST, whose parity with the dollar was backed by the value of Luna and an algorithmic arbitrage mechanism between one and the other.

The mechanism allowed that, before a sale of UST, Moons were sold in the market to pay that “dollar” with new Moons, and vice versa otherwise.

However, the loss of parity with the dollar for a few hours last weekend put its holders on alert, who had about 80% of the existing UST deposited in Anchor Protocol, a kind of bank that offered an annual return of 19.6% in exchange for these deposits.

That’s how the call started “spiral of death”: a massive sale of UST compensated by the issuance of Moons not absorbed by the market, which collapsed its price and forced an even greater issuance to maintain parity with the dollar.

Consequently, Luna went from being worth $64 per unit last Sunday to less than 1 cent and UST to less than 20 cents this Sunday.

“What happened with Terra has an impact on the rest of the ecosystem because it is used to generate fear and uncertainty. One speaks of Ponzi schemes when it is important to distinguish between applications and projects that may arise,” Beaudroit said..

Terra’s downfall is due to a massive run on UST-hosted money

And he added: “It is not good to ensure performance or generate situations that, in some way, encourage people to think that they can have a high performance with security that is not such. That is why the important thing is the consumer care and the best way to do it is with education. Make them understand that the decisions they make have an impact and they have to be held accountable.”

The question of whether a phenomenon like the one that happened with UST could happen with the rest of the stablecoins -USDT, USDC or DAI are the best known, whose capitalization is more than $132 billion- was what completely shook the market. scheme.

Although they have different backup mechanisms – some with audited bank deposits that supposedly secure each unit in circulation with a fiduciary dollar, and others with a basket of cryptocurrencies that far exceeds their value in circulation – the fear that they would collapse also filled with fear. market panic.

How the fall of cryptocurrencies affects

Bitcoin, Ether, Cardano, XRP, Polkadot, Avalanche and other cryptos fell between 25 and 50% in the last ten days, reaching their lowest prices since the end of 2020 on Wednesday morning, at the height of the crypto crisis.

“The market has already suffered these volatilities. The big difference is that, in Latin America, more than half of those who have crypto for the first time bought it after the pandemic and have never experienced such a scenario,” Ignacio Carballo assured Télam. , teacher, researcher and consultant of “crypto and alternative finance” for American Market Intelligence (AMI) in the United States.

“Many did it to buy supposedly stable currencies and whose use case was not decentralization and going against the system, but to have a currency that would protect it from the inflation of the dollar. Today that is in check and we have to see if Those people who were encouraged to buy assets like UST, with which they lost a lot of money, will be encouraged to do so again in the future,” Carballo reasoned.

Bitcoin, Ether, Cardano, XRP, Polkadot, Avalanche and other cryptos fell between 25 and 50% in the last ten days

The scenario that is unfolding now is the one that many had pointed out months ago: the end of the bull market that began in mid-2020 and the entry into a season of lower prices, which will leave room for the survival of projects that really add value and usability.

“The interesting thing is to see how all this is going to recover. We still have to continue working on the product and on how to generate greater liquidity, market, infrastructure and applications for daily life,” concluded Beaudroit.

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