Twinkle Dharmani
On May 9, the cryptocurrency industry suffered a big blow as the multibillion-dollar stablecoins TerraUSD and Luna lost their peg to the US Dollar. It’s domino effect on other crypto currencies and exchange platforms’ declining value left a sizeable impact on the 1.3 trillion USD cryptocurrencies market.
Terra, based on an algorithm, is connected to its sister token Luna to maintain its peg to the US Dollar. Its value plunged to as low as 11 cents per token. Even though they’re comparatively smaller stablecoins, their collapse led to decreasing value of its much larger rival, Tether. This also led Bitcoin, the world’s biggest digital asset, to sink below 30,000 USD, its lowest level of since late 2020s. Combined, these instances proved to be a single biggest destruction of wealth in the cryptocurrencies industry.
Stablecoins, as opposed to other crypto currencies, are pegged to a real world fiat currency like the USD or Euro. This means if there are 50,000 stablecoins in circulation, they need to have an equal or more amount of the real world currency they’re pegged to in reserves. These so-called stablecoins can be further used to buy other crypto currencies on exchange platforms, giving traders a sense of stability in a highly volatile market governed entirely by demand and supply. However, there is little to no knowledge about the currency reserves held by the stablecoin creators. This lack of transparency has put these coins under various central governments’ radar, attracting plans to regulate. What differentiates these digital assets from traditional currencies is that they’re decentralised, operating under blockchain technology.
This ‘crypto crash’ comes only months after major companies like EToro, Coinbase & FTX spent millions of dollars advertising at the American Superbowl in February. It was the first time that major crypto companies advertised in the mainstream, dubbing the championship as ‘Cryptobowl’.