A major factor in the slump was the cryptocurrency TerraUSD – this is a stablecoin that is designed for price stability and should not actually fluctuate. In the case of the backed stablecoins, their value is linked to a common key currency, usually the dollar, on a one-to-one basis.
Or, as in the case of TerraUSD, it is an algorithmic stablecoin: instead of foreign exchange or securities reserves, a complex mechanism of trading transactions with other cryptocurrencies should automatically keep the price stable.
In the case of TerraUSD, these are transactions with the freely tradable cyber currency Luna. By creating (“minting”) and destroying (“burning”) the digital assets, a balanced value and exchangeability for the dollar at any time should be ensured. If the USD rate was above the targeted level of one dollar, investors might exchange Luna for USD and then sell them at a profit on the respective exchange.
Severe system failure
In mid-May, however, the system imploded: the concept suddenly stopped working, the price got out of balance, stop-loss orders did the rest – and the prices fell into the abyss. And since the project operators tried to support the course through the mass sale of Bitcoin, it crashed at the same time. Other cryptocurrencies such as Ethereum and the Dogecoin preferred by Tesla boss Elon Musk felt the same way.
When does winter end?
There is currently “crypto winter”, i.e. a downward slide in the crypto market that lasts longer than a month. But bitcoin has repeatedly crashed in the past, only to come back bigger than before. Will it be different this time? The majority of experts tend to say no, but there are also other voices.
A few days ago at the World Economic Forum in Davos, Guggenheim’s head of investment, Scott Minerd, emphasized how important a value above $30,000 is: If Bitcoin falls below this mark permanently, as is currently the case, a drop to $8,000 is also conceivable, like the platform Investing.com reported. “So there’s a lot more room downside, especially if the Federal Reserve tightens monetary policy,” Minerd said.
“Most of the cryptos are not currencies, they are junk. I think we haven’t seen the ultimate dominant player in crypto,” suggesting that bitcoin may one day be ousted from the top spot.
Prominent crypto opponents
He is not the only one with the “junk” assessment: Star investor Warren Buffett, for example, has repeatedly expressed skepticism regarding cryptocurrencies. In the spring he said: “Even if you told me that you own all the bitcoins in the world and mine for $25 would sell, I would refuse.”
His arguments are similar to those of Microsoft founder Bill Gates, also no friend of Bitcoin and Co.: They have no real value, investors would only buy something that they hope might have more value in the future, an added value for society is not given. In addition, the ecological balance is devastating due to the high power consumption during mining.
However, other prominent investors remain optimistic, Investing.com wrote. Bill Miller, billionaire founder and head of investment firm Miller Value Partners, said he sees Bitcoin as an “insurance policy once morest financial disasters.” His example: “When the US withdrew from Afghanistan, Western Union stopped its services. Money transfers became impossible, but if you had bitcoins, everything was fine for you. Bitcoins can be sent to any corner of the world with a simple smartphone.”
Hai unter Haien
David Gerard, author of Attack of the 50 Foot Blockchain, thinks cryptocurrencies are frauds – but that is exactly the key to their longevity, as he recently told the tech magazine Wired. The heavily abbreviated tenor of the interview: the system might continue indefinitely, because as long as you invent money out of nothing, you will find someone to buy it. But only the big players would generate profits: “You can definitely make a fortune with cryptocurrencies. (…) But you bet that you will be a better shark than all the sharks that built the shark tank.”
Waiting for regulations
What might change following the current crash, however, would be the regulation of the market. Ashley Alder, head of the World Organization for Securities and Exchange Commissions (IOSCO), signaled the creation of an international cryptocurrency authority for next year. In addition to climate change and the pandemic, this is the third important issue for governments.
US Treasury Secretary Janet Yellen also said that the US needs a regulatory framework to protect once morest the risks associated with cryptocurrencies and stablecoins. The EU has also agreed on a draft of rules for cryptoassets, a law is still pending. According to author Gerard, regulation is needed to “ensure these crypto suckers don’t mess up the very economy that people live in.” Contradictions and objections are certain.