Crypto’s unthinkable rise from the dead

Those who heralded the death of crypto this week were put in their place after a phenomenal resurgence on Friday.

Bitcoin bounced back after a tough few days on Friday, rising 14.08% (and counting) in the past 24 hours.

Ethereum, the world’s second most popular cryptocurrency, also rose 17.16% after falling earlier this week.

As of this writing, Bitcoin now sits at $43,600, with Ethereum at AUD$3,000 per coin. They are now back to the price they were at a week ago before social media went hysterical over the sudden drop.

Over the past week, bitcoin’s value has fallen nearly 60% from its all-time high.

A mouth-watering $200 billion (A$291 billion) was eviscerated from the crypto market in just 24 hours, as reported by CoinMarketCap, while a drop in Asian crypto-related stocks indicated that the panic was spreading.

The hit fueled speculation that we could be heading into a “crypto winter” – a term given to a long period when many cryptocurrencies lose most of their value.

But elsewhere on cryptocurrency forums, cashed-in buyers and devotees of a resurgence were licking their lips, urging anyone within earshot to “buy the dip.”

Insiders attributed the crash to fears that the US Federal Reserve’s attempts to rein in soaring inflation could push the economy into a recession, which suddenly made less safe investments like cryptocurrency a very unattractive option.

But this week, a much more specific crisis unleashed, sending shockwaves through the industry.

One solution to crypto’s instability was the invention of so-called “stablecoins” – cryptocurrencies that are “pegged” to the US dollar or other traditional assets, which protected them in market bloodshed theory.

This week, TerraUST, an “algorithmic” stablecoin whose value is backed by a sister token known as Luna, broke this crucial peg, which saw its value drop to just 30 cents.

The idea behind this arrangement is that if Terra fell below $1, it could be swapped for Luna, which was supposed to provide stability – but this week the two crashed simultaneously, with Luna crashing 98%, some investors losing their life savings.

The same happened to fellow stablecoin Tether, which also broke its peg to the US dollar.

Crypto’s “Death Spiral”

While the crypto boom has attracted a legion of die-hard fans, there have also been a slew of skeptics who, from day one, have warned of the innate instability of the market.

Speaking to CNN following the initial crash, Henry Elder, who heads decentralized finance at digital asset manager Wave Financial, said the current stablecoin crisis is “exactly the ‘death spiral’ that many people had predicted”.

Meanwhile, Dan Ashmore, crypto data analyst at Invezz.com, also weighed in on the drama, saying a move by Terra was the “key to their demise.”

Mr Ashmore noted that earlier this year, Terra founder Do Kwon announced that bitcoin would be used as collateral in the event of a scenario where large amounts of UST were sold – a move that could have sealed his fate.

“That’s the key, and that was a massive oversight by Terra. It doesn’t make much sense to collateralize an asset (UST) with a highly volatile asset (BTC). It makes even less sense when those two assets are correlated to each other,” he said.

Crypto loyalists hold out hope

However, many pundits – such as Balmoral Digital co-founder and portfolio manager Jesse Smythe – remained confident that the crypto would “rebuild and recover” after the busy week.

In a statement, Mr Smythe said confidence had been “hit hard” and there were “serious strains” on the system.

“We have already seen very high volatility in crypto. One of the industry slogans is ‘Hold on For Dear Life’ for this reason,” he said.

“Ultimately, markets are made up of people, people get emotional and that can lead to wild bear markets in even the safest investment grade bond markets.

“Crypto is a very young asset class. It’s amazing what has already been achieved in such a short time and it will continue to evolve and get better and better.

– with Alexis Carey

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