Saturday, May 28, 2022

Bitcoin Tumbles in the Wild Week for Cryptocurrency

NEW YORK ( Associated Press) – It’s been a wild week in crypto, even by crypto standards.

Bitcoin fell, stablecoins were anything but stable and one of the crypto industry’s highest-profile companies lost a third of its market value.

Here’s a look at some of the major developments in cryptocurrencies this week:

According to CoinDesk, the price of bitcoin fell to around $25,420 this week, the lowest level since December 2020. It held steady at around $30,000 on Friday, but it is still less than half the amount of bitcoin it gained last November.

Some bitcoin proponents have said that the digital currency can protect its holders from inflation and act as a hedge against stock market declines. Until recently, it has done neither. Inflation at the consumer level rose 8.3% in April from a year ago, last seen in the early 80s. As the Federal Reserve aggressively raises interest rates to cushion inflation, investors are dumping riskier assets, including stocks and crypto. The S&P 500 is down more than 15% this year. Bitcoin is down about 37% to date.

Other cryptos have performed equally poorly. Ethereum is down 44% and Dogecoin, the cryptocurrency favored by Tesla CEO Elon Musk, is down 53%.

Stablecoins have been seen as a safe harbor among cryptocurrencies. This is because the value of many stable coins is pegged to a government-backed currency, such as the US dollar, or to precious metals such as gold.

But this week one of the more widely used stablecoins, Terra, experienced the cryptocurrency equivalent of a run on the bank.

Terra is a stablecoin in a cryptocurrency ecosystem known as Terra Luna. Terra is an algorithmic stablecoin, which means that it adjusted its supply through complex buying and selling to keep its peg up to $1. Terra was also promoted by an incentive program that gave its holders higher yields on their Terra. The Luna was a coin used to buy and sell assets in the ecosystem, and at its peak it was worth over $100.

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Although the developers of Terra said that its algorithms would outperform the stablecoin, they decided to take it further with the holding of bitcoins.

Terra’s problems began with a combination of withdrawals of hundreds of millions, perhaps even billions of dollars, from Anchor, a platform that supported stablecoins. With the overall concerns around the cryptocurrency and the decline in the price of bitcoin, Terra began to lose its peg against the US Dollar. The bitcoins that Terra owned were less than what they paid for it, and selling those bitcoins on the market caused the price of bitcoin to drop even further.

Attempts by Terra’s developers to increase liquidity failed. On Friday, Terra fell by 14 cents and Luna was trading at less than ten thousandths of a cent.

Coinbase lost nearly a third of its value this week, during which the cryptocurrency trading platform reported a 19% drop in active monthly users in the first quarter amid a drop in crypto values.

In a letter to shareholders, Coinbase said it believes the current market conditions are not sustainable and that it is focused on the long term, prioritizing product development. While most Wall Street analysts expect Coinbase to weather the storm, they are also warning that increased regulation of the cryptocurrency could hinder the company’s growth.

There has been a lot of talk about regulating cryptocurrencies, but little in the way of action.

Treasury Secretary Janet Yellen, responding to volatility in crypto markets this week, said on Thursday that the US needs a regulatory framework to hedge against the risks surrounding cryptocurrencies and stablecoins.

In March, Federal Reserve Chairman Jerome Powell said that new forms of digital currency such as cryptocurrencies and stablecoins present risks to the US financial system and will require new regulations to protect consumers. This Monday, just before Terra’s explosion, the Fed said in its semiannual report on financial stability that stablecoins are vulnerable to “runs” that could harm coin owners.

Securities and Exchange Commission Chairman Gary Gensler has said that the crypto industry is “filled with fraud, scams and abuse” and that his agency needs more authority – and more money – from Congress to regulate the market.

The UK 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 cryptocurrencies, but a final bill is still to be negotiated.

Associated Press Economics writer Christopher Ragber contributed.

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Nation World News Desk
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