Until recently, Bitcoin was considered a store of value that was somewhat immune to fluctuations in the value of risky assets. Today, BTC has fallen prey to the types of factors that move the value of risky assets, such as inflation, stock markets and the Fed's monetary policy. In particular, stablecoins are in the spotlight. This type of cryptocurrency, as the name suggests, is supposed to have a stable value because tokens are tied to the value of a currency such as the U.S.
UU. The dollar or a commodity such as gold, which provides relative isolation from extreme volatility. What is behind all this? What is coming for the cryptocurrency market? We spoke to finance and investment experts to get an overview. The downward result was that inflation rose to the highest level in four decades.
Abundant liquidity also drove up prices in most asset classes, including traditional stock markets and cryptocurrency markets, as traders invested their money in anticipation. Rising prices pose an economic problem for people, as our incomes do not, for the most part, increase in line with prices and threaten economic growth in general. For damage control, earlier this month the Fed raised interest rates by half a percentage point, the biggest increase in about two decades. The Fed is also in the process of reducing the money supply to further curb the fall in inflation and is expected to continue raising rates in the future.
These are two cryptocurrencies created by the Terra network, a blockchain project developed in South Korea. Luna acts as collateral currency for UST. Stablecoins, including TerraUSD and Luna, were touted as a class of crypto asset that, as the name suggests, offered more stability during market volatility. Earlier this week, UST broke parity with the dollar and, for the first time, the value of 1 UST fell to less than a dollar, fell to less than 30 cents.
As the price of UST plummeted, large Luna holders withdrew, causing the supply of Luna tokens to rise and their price to fall. Luna lost 99% of its value on Thursday. According to Bloomberg Intelligence, the sharp drop in the value of Luna seemed like the worst day for a financial product ever seen and prompted cryptocurrency exchanges to withdraw the coin from the list, halting their trading as there was no liquidity in the market. One possible reason for the seriousness of this decline is the particular price structure of the UST token, said Edward Moya, a senior market analyst at OANDA, a foreign exchange platform.
UST operates differently from other stablecoins, such as Tether, which are backed by a government-backed currency or commercial papers. It is an algorithm-based stablecoin and uses a complicated method, with the help of Luna, to ensure that its value is maintained against the dollar. The Fed recently noted stablecoin concerns in its biannual financial stability report, saying that the fast-growing sector, which makes up approximately 15% of the total cryptocurrency market capitalization, is vulnerable to racing and its risks could extend to markets traditional. The cryptocurrency market, like the stock market, has been suffering declines for months.
It peaked in November, and with aggressive signs of tightening Fed liquidity, all asset markets have seen since. Sylvia Jablonski, CEO and chief investment officer of Defiance ETFs, said the correlation with Nasdaq is 0.82, above historical levels below 0.5 (on a scale of 0 to. In similar terms, both traditional and stock markets are moving in similar directions more than ever before, so there is an overflow effect on investor confidence. Experts are seeing a stronger correlation between cryptocurrency and tech stocks, which are among the stocks hardest hit in the recent market crash.
Some cryptocurrencies, in particular the bitcoin market giant, were touted as assets whose value would be maintained over time, meaning that they would be a good hedge against inflation. But as inflation has increased, bitcoin's price more than halved, making it less attractive to investors during high periods of high prices. Occasionally, you may receive promotional content from the Los Angeles Times. Somesh Jha, a financial journalist with nine years of experience reporting on India's federal government from New Delhi, is working with the Los Angeles Times Business team as a journalism intern through the Alfred Friendly-Organized Crime and Corruption Reporting Project.
He has reported on topics ranging from work, public finance, banking and politics, and his research on “data politics in India” gained international recognition after he revealed official survey reports, withheld by the government, showing record unemployment and a possible increase in levels of poverty. The purpose of a stablecoin, as the name suggests, is to provide a “safe” crypto asset that maintains a stable valuation. But this week's rapid declines have been especially sharp for investors who bought cryptocurrency when prices rose last year. That gave “a false sense of security to people who otherwise wouldn't know about these things,” said Kathleen Breitman, one of the founders of Tezos, a cryptocurrency platform.
Bitcoin and other cryptocurrencies may eventually see their volatility and correlation with other risky assets disappear. Other forms of cryptocurrency, including Ether and Dogecoin, captured public attention, particularly in the pandemic, when excess cash in the financial system drove people to conduct daily transactions for entertainment. The major cryptocurrency has been trading in the red for the past few weeks, dropping as much as 20% last week. But price action in cryptocurrencies suggests that the market doesn't seem to see these highly volatile assets as reliable stores of value during periods of economic uncertainty.
Musk has long been an advocate for cryptocurrencies, and Tesla's decision made itself felt across the market, with other digital tokens dropping in price. Like most other cryptocurrencies, Bitcoin is not tied to physical assets or intellectual property, and it does not generate cash flow or pay dividends or interest to investors. Hunter Horsley, CEO of Bitwise Asset Management, which provides crypto investment services to 1,000 financial advisors, met with more than 70 of them this week to discuss the market. If you have, don't stress about the changes, because they will continue to happen, according to Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analysis platform.
Reconsider what you might be more comfortable with in the future, such as allocating less to cryptocurrencies in the future or diversifying through crypto-related stocks and blockchain funds rather than buying cryptocurrency outright (although you should still expect volatility when cryptocurrency markets fluctuate). In an industry as new and untested as cryptocurrency, it doesn't take much to generate big price changes. Some of the declines have been caused by a combination of factors, Noble theorizes, from enthusiasm for low-quality coins, to negative comments from Elon Musk, to China's recent crackdown on crypto services. .