This week has been rather volatile for the crypto markets and Bitcoin. However, it should’t feel out of the ordinary for people who are not new to this space. The biggest news of the week was the implosion of the TerraUSD (UST) stablecoin. It turned out to be far less stable than its holders were led to believe.
Additionally, comments from United States Secretary of Treasury, Janet Yellen, and the plateauing of inflation for the U.S. dollar could have ramifications for bitcoin and the rest of the crypto market over the coming months. Let’s take a closer look at the three biggest crypto stories of the week.
Terra is a project that focuses on the creation of algorithmic stablecoins for use throughout the decentralized finance ecosystem. There is a need to create a more permissionless stablecoin for DeFi, as centralized stablecoins like USDC and USDT. These are being back by U.S. dollars. Other assets held in traditional financial institutions, are susceptible to onerous regulations and potential shutdowns.
However, it has proven difficult for anyone to create a decentralized, algorithmic stablecoin that is able to hold its intended price level. UST has turned out to be no different. Especially as it began to lose its $1 peg early in the week and eventually fell below $0.20.
The LUNA crypto asset, which is used as collateral to back the UST stablecoin, also completely collapsed during the week, dropping from around $80 to less than a hundredth of a penny in a matter of days. LUNA has continued to see dramatic declines in value, as those in charge of the project have effectively hyperinflated the supply of LUNA in an effort to revitalize UST.
Once UST originally lost its peg to $1, faith in the Terra ecosystem as a whole began to crumble, which led to a collapse of the LUNA price as holders fled to safety. It was basically a downward spiral where the failures of LUNA and UST were feeding off of each other. It’s unclear what will happen with Terra going forward, but the general consensus among crypto experts is that this project is unlikely to make any sort of comeback.
Many have referred to Terra as an outright Ponzi scheme in the aftermath of its collapse, and newcomers to the cryptocurrency space should take this as a warning of the risks associated with speculating on crypto assets, especially those outside of longstanding, trustworthy options like bitcoin.
Janet Yellen Comments on Crypto
During an appearance in front of the U.S. Senate earlier this week, U.S. Treasury Secretary Janet Yellen commented on the implosion of the UST stablecoin. Stablecoins have been a key area of interest in the overall crypto market for lawmakers and regulators alike. So, this is not a comment that came out of nowhere. In her testimony before the Senate, Yellen stated, “I think that [the collapse of UST] simply illustrates that this is a rapidly growing product and that there are risks to financial stability.”
This sort of run on the bank and breaking of the one-to-one peg is what regulators have warned about. That said, regulators are mostly focusing on more traditional, centralized stablecoins such as USDC and USDT.
Despite the size of the UST implosion, the algorithmic stablecoin market is still small. Especially, when compared to the more centralized stablecoins that are available on exchanges. The collapse of UST is also likely to prevent large amounts of growth from happening in the algorithmic stablecoin sector. It’s likely there will be new regulations put into place for all variations of stablecoins due to the collapse of UST.
Finally, remember that inflation is a key metric for those involved in the crypto market to watch. This is especially for those who focus on bitcoin. The decline of fiat currencies as a whole is one of the main investment theses behind a potentially steep increase in the bitcoin price this decade, and U.S. inflation numbers have been at levels never seen by younger generations over the past few months. Inflation was at its highest levels since the 1980s in March, but it finally began to turn itself around in April.
The 8.3% year-over-year inflation number from April was comforting for some. However, the reality is the high inflation levels in the U.S. are likely still far from over. The unexpectedly high inflation numbers from April spooked markets a bit. The S&P 500 now nearly 20% off the all-time highs hit in January of this year. Going forward, holders of bitcoin and other crypto assets should keep an eye on the actions of the Federal Reserve.
Their policies can have a huge impact on the various inflation hedges found on crypto exchanges. The Federal Reserve is basically trying to thread the needle. Especially, when it comes to curbing inflation through higher interest rates while also not sending the economy into a recession.
This disclaimer informs readers that the views, thoughts, and opinions expressed in the text/sponsored content belong solely to the author, and not necessarily to Bitcoin of America, organization, committee or other group or individual. All investments are at your own risk and should be done after careful research.