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TradersBest.com / Terra Collapse Hits Crypto Markets

Terra Collapse Hits Crypto Markets

Publish Date: 13/05/2022

The value of the Terra coin fell by over 99% and sent shockwaves through the cryptocurrency market. Terra was previously ranked among the top 10 highest valued cryptos but it saw its value plummet below $1 on Wednesday. This led the market cap of Terra to slump from $45 billion to below $5 billion in just a handful of days. 

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It’s a bitter fall from grace for Terra as the coin had previously been valued at nearly $120 in April, but the algorithm behind the so-called stablecoin failed to keep its price fixed. This caused investors to rush in and try and liquidate their assets and bedlam hit the crypto markets causing massive falls for other coins like Luna and Tether.

Even Bitcoin saw its value fall by over 10% taking the coin down to below $27,000 – its worst trading value in over a year and a half. Plus with Ethereum also taking a massive hit, the overall damage to the global crypto market is thought to be around $200 billion. The end result was that many of the world’s largest crypto exchanges were left with little option but to suspend the withdrawal of various digital coins.

Is there a future for stablecoins?

The dramatic fall from grace for Terra has raised big questions about whether these stablecoins actually work. Stablecoins were introduced in a bid to save cryptocurrencies from the volatility experienced by digital assets such as Bitcoin.

Terra was created to have a fixed value of around $1 and it was hoped to give investors a safe store of value. Like Tether and USD Coin, Terra’s sustainability is based on it having a large reserve of liquid assets that is propped up by a special kind of algorithm that uses smart contracts to effectively print digital money.

Wednesday saw the algorithm behind the Terra coin failing as it simply couldn’t keep up with the flood of investors rushing to withdraw their investments and the failure took the other half of the stablecoin, Luna, with it. Luna works in opposite to Terra and the theory is that if Terra fails, then Luna investors will trade their coins in which would stabilize the market. However, Luna also crashed and saw its value slide from $86 to just $0.86.

It was a shattering blow for the entire concept of stablecoins and does little to assuage fears that these digital assets are little more than a Ponzi scheme. Prior to the crash, various government agencies had been tentatively introducing plans to legislate stablecoins as a legitimate form of payment.

The US Treasury Secretary, Janet Yellen, noted that the collapse of Terra would leave the government with little option but to introduce further regulation to halt the ‘risks to financial stability’.

As such, all eyes are now on other popular stablecoins such as Tether to see whether they could suffer a similar fate as Terra. All of which made for one of the worst days on the crypto markets.

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