NEW YORK (AP) — It’s been a wild week in crypto even by crypto standards.
Bitcoin plummeted, stablecoins weren’t stable at all, and one of the crypto industry’s biggest names lost a third of its market cap.
Here are some of the major developments in cryptocurrencies this week:
Bitcoin fell to around $25,420 this week, its lowest level since December 2020, according to CoinDesk. It was steady at around $30,000 on Friday, but that’s still less than half the price of bitcoin last November.
Some bitcoin proponents say the digital currency can protect its holders from inflation and provide a hedge against falling stock markets. Recently, it has not been completed either. Inflation at the consumer level rose 8.3% in April from a year earlier, the last level seen in the early 1980s. Investors are dumping risky assets, including stocks and cryptocurrencies, as the Federal Reserve aggressively raises interest rates to try to tame inflation. The S&P 500 is down more than 15% this year. Bitcoin is down about 37% so far this year.
Other cryptocurrencies have performed similarly poorly. Ethereum fell 44% and Dogecoin, the cryptocurrency favored by Tesla CEO Elon Musk, fell 53%.
Stablecoins have long been seen as a safe haven among cryptocurrencies. This is because the value of many stablecoins is pegged to government-backed currencies such as the U.S. dollar or precious metals such as gold.
But this week, Terra, one of the more widely used stablecoins, experienced the cryptocurrency equivalent of a bank run.
Terra is a stablecoin in the cryptocurrency ecosystem called Terra Luna. Terra is an algorithmically stable token, which means it adjusts its supply through complex buying and selling to maintain its peg to $1. Terra is also fueled by an incentive program that provides its holders with high returns on Terra. Luna, a token used to buy and sell assets in the ecosystem, was worth over $100 at its peak.
Although Terra’s developers said its algorithm would support stablecoins, they decided to support it further by holding bitcoin.
Terra’s problems started with the withdrawal of hundreds of millions or even billions of dollars from Anchor, a platform that supports stablecoins. Combined with the overall concerns about cryptocurrencies and the fall in bitcoin prices, Terra began to lose its peg to the dollar. Terra’s bitcoins were also worth less than they paid, and selling those bitcoins to the market caused bitcoin’s price to fall further.
Efforts by Terra’s developers to support liquidity have failed. Terra fell to 14 cents on Friday, while Luna was trading at less than a ten thousandth of a cent.
Coinbase lost about a third of its market value this week, during which time the cryptocurrency trading platform reported a 19% drop in monthly active users in the first quarter as the value of cryptocurrencies fell.
Even before Coinbase reported a quarterly loss of $430 million, investors had been fighting for an exit. Shares closed at $58.50 on Thursday. On the day of its IPO 13 months ago, the share price hit $429 per share.
Coinbase said in a letter to shareholders that it does not believe current market conditions are permanent and that it remains focused on the long-term while prioritizing product development. While most Wall Street analysts expect Coinbase to weather the storm, they also warn that increased regulation of cryptocurrencies could hamper the company’s growth.
There is a lot of talk about regulating cryptocurrencies, but very little action.
Responding to this week’s volatility in crypto markets, U.S. Treasury Secretary Janet Yellen said on Thursday that the U.S. needs a regulatory framework to guard against risks surrounding cryptocurrencies and stablecoins.
In March, Federal Reserve Chairman Jerome Powell said new digital currencies such as cryptocurrencies and stablecoins posed risks to the U.S. financial system and that new rules were needed to protect consumers. On Monday, just before Terra imploded, the Federal Reserve said in its semi-annual report on financial stability that stablecoins are vulnerable to “runs” that could harm token owners.
SEC Chairman Gary Gensler said the crypto industry is “riddled by fraud, scams and abuse” and that his agency needs more power from Congress — and more money — to regulate the market.
The U.K. has unveiled plans to regulate stablecoins as part of a broader plan to become a global hub for digital payments. EU lawmakers have agreed on draft rules for crypto assets, but negotiations on a final bill are still required.
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