That’s not what people sign up for.
Not long ago, investors were attracted to cryptocurrencies as an alternative to the stock market.
“The era of free money is over”
They believe that their crypto assets can act as a safe haven when the stock market falls, and their traditional assets can do the same if cryptocurrency prices drop.
However, the wall between the two has come down and cryptocurrencies have been moving in the same direction as the stock market. And, more recently, the direction has been down.
“The era of free money in the U.S. is over, and fissures are emerging in various financial markets — including cryptoassets,” said Winston Ma, managing partner at CloudTree Ventures and author of “Digital Warfare — How China’s Tech Is Going Power Shapes Artificial Intelligence.” , the future of blockchain and cyberspace. “
John Kicklighter, chief strategist at DailyFX, said, “As the general capital market declines, so does the argument that unique and novel assets are out of touch with the natural ebb and flow of speculative appetites.”
He added: “Having seen a shaken belief in the ability of retail investors to drive meme stocks against the trend and the disruptive advantages of tech companies, we are now seeing systemic threats penetrate deep into the crypto market.”
The IMF looked at the issue in a January blog post after cryptocurrency prices fell again, noting that “prior to the pandemic, cryptoassets like bitcoin and ether had little correlation with major stock indices.”
“They are considered to help spread risk and serve as a hedge against volatility in other asset classes,” the IMF said. “But that changed after the extraordinary central bank crisis response in early 2020.”
“Critical Infrastructure for Cryptosystems”
Cryptocurrencies have been plunging recently when the stablecoin UST and its sister coin Luna lost almost all of their value.
A stablecoin is a digital currency whose value is pegged to a fiat currency such as the euro or the dollar.
Stablecoins are critical infrastructure for crypto systems, Ma said, “acting as a bridge between individual users who use U.S. dollars at traditional banks and the world of ‘blockchain’ where people use crypto.”
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UST and Luna are the main tokens of the Terra Protocol, a decentralized and open-source public blockchain protocol for so-called algorithmic stablecoins, backed by computer code rather than traditional collateral such as cash.
When the price of UST drops, owners can resell their assets to the Luna Foundation Guard in exchange for $1. In this way, the stablecoin reserve decreases, thereby increasing its value until it returns to normal levels.
However, the system does not consider the situation where users redeem a large amount of UST at one time in a short period of time. Meanwhile, Tether, the world’s largest stablecoin, briefly lost its one-to-one peg to the U.S. dollar last week.
On Monday, May 16, the Luna Foundation Guard, a nonprofit founded to support the development of the Terra ecosystem, said it has more than 80,000 bitcoins and only 313 in reserves.
“The foundation is seeking to use its remaining assets to compensate the remaining users of $UST, starting with the smallest holders,” the foundation said in a series of tweets. “We are still debating through various distribution methods and there will be an update soon.”
“Regulators’ laser-locked focus”
UST was down 6.6% at $0.079323 at the last check, down nearly 92% from a week earlier, according to CoinGecko. Bitcoin fell about 1% to $29,685.50, while ethereum fell 1.1% to $2,007.63.
Losses and uncertainty surrounding the cryptocurrency industry have increased calls for regulation.
Earlier this month, the U.S. Securities and Exchange Commission said it nearly doubled the size of its crypto assets and networking division by adding 20 jobs in the division.
Treasury Secretary Janet Yellen has insisted that stablecoins pose a threat to financial stability and called for greater regulation.
David Lesperance, managing partner of immigration and tax advisors at Lesperance & Associates, said: “Both stablecoins and exchanges have already doomed them and ensured great attention from regulators.” He added, “SEC Chairman Gary Gensler noted that cryptocurrency exchanges are not acting in the best interests of their customers.”
Jack Ma shared a similar sentiment, saying that “as the crypto infrastructure breaks down, the U.S. government may accelerate its push for stablecoin regulation.”
“While traders will be on high alert for other similar issues in this space; regulators are more provocative in their claims of tighter controls in this space,” Kicklighter said.
“I will reiterate my point that when both policymakers and the market fully embrace cryptocurrency, it can become a much more boring space — almost akin to a utility,” he said. “It’s this extreme volatility that attracts traders and eager regulators.”