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The week that rocked the cryptocurrency

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In January, Mike Novogratz—hedge fund rock star turned crypto major— tweet a picture From a large new tattoo on his left shoulder. The photo featured a wolf howling at the moon and a sign that read “Luna,” a cryptocurrency that then traded at $78.

“I’m officially crazy!!!” She encouraged the never-before-seen large investor in the hedge fund group Fortress, who is now the founder and CEO of Galaxy Digital, an investment management firm aspiring to be the “Goldman Sachs of crypto.” By the beginning of April, Luna had peaked at $116 after it was snapped up by buyers including enthusiastic retail investors.

But this week, Luna lost it all. Its value fell to zero after the collapse of terraUSD, a sister token, although designed to track the value of the US dollar.

It is unclear what Novogratz would do about his tattoo. The CEO of Galaxy, which has invested in the company behind the tokens, did not respond to several requests for comment. But the demise of Luna and Tira left an imprint on the world 1.3 trillion dollar cryptocurrency market. Coins come and go – thousands have died since the invention of Bitcoin in 2009. But Tera’s failure is over. It was designed to be the so-called Stablecoin – a hard and boring token that simply tracks the dollar.

His sudden death, at a time when cryptocurrency valuations were already declining, raised serious questions about the performance of the entire cryptocurrency market. In just one week, Coinbase’s valuation has collapsed, bitcoin prices have fallen below $30,000 for the first time since last summer, and Tether – the largest crypto-like stablecoin – has failed to maintain its dollar peg.

Many financial markets have fallen sharply in recent weeks, as investors spooked high inflation and the prospect of sharp interest rate hikes. But the crash in cryptocurrencies was more dramatic.

Their performance undermined claims that crypto assets could provide a hedge against inflation or act as a form of digital gold — not to mention the huge bragging from crypto proponents about the potential for digital tokens to become a pillar of the new global financial system.

Galaxy Investment Partners CEO Mike Novogratz tweeted a photo of a new tattoo in January showing a wolf howling at the moon and a sign reading it
Galaxy Investment Partners CEO Mike Novogratz tweeted a photo of a new tattoo featuring a wolf howling at the moon and a sign that read “Luna” © Mike Novogratz/Twitter
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Research firm CryptoCompare said Luna was “the largest wealth destruction in this amount of time in a single project in crypto history.”

Ran Neuner, a prominent crypto dealer and outspoken token enthusiast, argues that Luna’s failure is “one of the greatest disasters crypto has ever seen.” He said in a newspaper that there is a “real alarm” that cryptocurrency prices could drop to zero Online broadcasting To thousands of digital asset traders on Friday.

back to earth

Many believers will always believe in the cryptocurrency project – its supposed potential to replace the dollar in global trade, and a libertarian break with the traditional financial institution. “On average, the government will destroy its currency every 27 years,” said Michael Sonnenshyn, CEO of crypto investment firm Grayscale. at the FT . event in late April. “Investors or citizens wake up and see their purchasing power erode overnight, sometimes upwards of 10 percent.”

A customer uses a cryptocurrency ATM in a shopping mall in Madrid, Spain
A customer uses a cryptocurrency ATM at a shopping mall in Madrid, Spain © Angel Navarrete/Bloomberg

But the turmoil of recent days has highlighted how those looking to make a fortune in cryptocurrency are taking a tough bet.

TerraUSD was a beta model. Usually, stablecoin operators say they are backed one-on-one with dollar-based reserves. By contrast, Terra was powered by an algorithm tied to its sister token, luna, to keep its dollar peg in check. But the $1 value of the Terra started slipping Monday when faith in the model evaporated, ending the day at about 90 cents. It fell further until it reached less than 15 cents on Friday. Various rescue efforts by backers failed, and on Thursday, the Terra blockchain was paused, although backers still hope it can be revived.

The price of Bitcoin, the oldest and largest cryptocurrency, is down 11 percent on Monday, 12 percent this week and down more than 50 percent since November 2021. But the failure of Tera, which was once among the top five stablecoins, also took its toll.

Terra’s relatively small size means that its demise is not systemic for the broader crypto market. What matters most is that the episode revived concerns about potential cracks in other stablecoins, including the largest of them all, Tether, calling into question the fundamentals behind the crypto industry.

Thursday, It also failed to link the currency that links it to the value of one dollarWith the price of the token dropping to 95.11 cents. Tether differs from terra in an important way: rather than relying on an algorithm, its operators say its dollar peg is maintained by dollar-based reserves — enough to match the tokens in circulation.

“When it’s not, like when money markets froze during the financial crisis, utter panic sets in,” says Andrew Beer, managing director at US investment firm Dynamic Beta.

“Terra was like putting your money in an Iranian bank that offered an interest rate of 20 per cent and then suddenly closed its doors,” he adds. “Good luck getting your money back or even finding out what happened.”

Tether Chief Technology Officer Paolo Ardoino I swear to defend Pegging the currency to the dollar “at any cost”. And this week he said he was willing to sell some of the “tons” of US government debt that Tether had collected in the effort. But details about the composition of these reserves are poor. Arduino this week declined to tell the Financial Times more about his holdings of $40 billion in US government debt, saying he wanted to protect the company’s “secret sauce.”

Line chart of $ per token showing Tether sinks below $1 peg

A deeper failure to tie the rope is likely to be disastrous for the broader crypto market, such as some estimates We suggest that up to 70 percent of bitcoin purchases are made using the blockchain’s original dollar alternative.

“If Tether stops exchanging one tether for one dollar — that is, breaks the tether — that will have a huge impact on all the markets that trade against the rope,” says Ingo Fiedler, associate professor at Concordia University in Montreal who directs the Blockchain Research Lab. .

But Ilan Solot, a partner at crypto hedge fund Tagus Capital, says that this week the cryptocurrency market has faced undue criticism. “What bothered me was the whirlwind of baseless accusations . . conspiracy theories . . . and digging dirt.”

He believes that the rope is stronger than his failed competitor. “Tether has a lot of that potential . . . to be like a Lehman moment, the cascade of consequences going to be very broad,”[But] The rope is unlikely to go to zero more than the ground.” However, he said, the potential for “systemic hazards” arising from the rope is a legitimate point of concern.

Bitcoin City

It’s not just the fluctuations in coin prices and stablecoin wedges that have hit the market lately.

Europol gave a reminder this week of the scams and scams that swept the market, when it happened Developed by Ruja Ignatovathe inventor of onecoin, is on the list of “wanted fugitives,” saying it “urged investors from all over the world to invest in [an] “A worthless currency.” Europol said losses in its scheme could reach several billion dollars.

On Tuesday, Coinbase Exchange said in its first-quarter earnings report that monthly transacting users, trading volume and assets on the platform all fell from the previous quarter, indicating that weaker crypto prices are not attracting retail investors as much as they have in the past.

Screens display Coinbase banners during the company's initial public offering at the Nasdaq MarketSite in New York

Coinbase shares have now lost more than 80 percent since they debuted on the market last year, and are down 38 percent this week to $58 on Friday. © Michael Nagle / Bloomberg

Coinbase shares have now lost about three-quarters of their value since they debuted on the market last year, and are down 32 percent this week to $72 on Friday. “We’re not sure that this stock is worth more than the cash on its books or $33 a share,” says David Trainer, CEO of investment research firm New Constructs.

Coinbase is not alone. The tech-heavy Nasdaq is down 27 percent this year, and other non-crypto-only stocks like Netflix and Peloton are down 71 percent and 63 percent, respectively.

Some of the simultaneous declines in cryptocurrency prices and tech stocks may be self-reinforcing. “A lot of cryptocurrency owners also own tech stocks and lose a lot of money. These guys are selling some of their holdings in a panic, and that’s driving the market lower,” says Edward Hendi, chief investment officer at Tyr Capital, a digital asset manager.

The slide in cryptocurrency prices is also hurting the big owners. Perhaps the most notable of these is the government of El Salvador, whose crypto-enthusiast president, Neb Bukele, introduced bitcoin as legal tender last year. This week, he shared photos on Twitter of his gold microcosm of a planned Bitcoin-funded crypto city.

Neb Bukele, President of El Salvador, left, with his gold scale model of a crypto-funded Bitcoin city

Neb Bukele, President of El Salvador, left, with his gold scale model of a crypto-funded Bitcoin city © Nayib Bukele / Twitter

Even amid the decline in bitcoin prices this week, Bukele hoarded more cryptocurrency, making the latest government purchase of 500 bitcoins at an average price of $30,744 each. I can sell [these] Coins right now and make nearly a million dollars in just 11 hours, but of course not,” he tweeted a day later.

Bitcoin became legal tender in September. El Salvador has spent more than $100 million on bitcoin, according to the Financial Times, and by this week, the country’s crypto reserves had fallen to nearly $72 million.

“Right now, we don’t really know,” says Hector Torres, senior partner at Torres Law Firm in El Salvador. “Why invest in bitcoin when schools are disrupted, roads are not built, or Which bridges should be repaired?” he adds. “This is the standard comment for people who oppose the president’s decision.”

Cryptocurrency markets have shown extraordinary staying power, surviving several apparent near-death experiences in the past, including a 30 percent drop in one day last year in response to a regulatory crackdown in China.

Employees check fans on mining machines at the Bitfarms crypto-cultivation facility in Farnham, Quebec, Canada
Employees check fans on mining machines at the Bitfarms crypto-cultivation facility in Farnam, Quebec, Canada © Christinne Muschi/Bloomberg

However, the recent volatility is unlikely to convince already conservative institutional investors to take off. “The issue of institutional adoption appears to be declining by the day, as space does not offer safe haven and only negative diversification across private risks,” analysts at UBS said this week.

The recent volatility suggests that rather than forging a path toward building a new decentralized financial system, cryptocurrencies are likely to remain get-rich-quick bets for high-risk investors.

“We believe that crypto will find it very difficult to sustain the monetary system of the future,” Hyun Shin, who leads the monetary and economic division of the Bank for International Settlements, said last month. “I suspect [crypto] It has more attributes of a speculative asset.”

Additional reporting by Lawrence Fletcher and Adam Samson

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