The collapse of cryptocurrencies

With The collapse of cryptocurrencies, Bitcoin’s value has fallen more than half since its peak in November 2021, causing the entire cryptocurrency to collapse. Terra (LUNA) and TerraUSD (UST) both experienced sharp declines that could scare investors. When these cryptocurrencies were enjoying a period of prosperity and growth a month before the crash, who would have thought they would face such a sharp decline? Weak sentiment throughout the cryptocurrency market led investors to withdraw their money, causing Tether (USDT) to lose its currency peg to the dollar.

Cryptocurrency collapse not only taught investors to invest carefully but also revealed many myths about the cryptocurrency market.

Bitcoin may not be the best way to hedge against inflation

The cryptocurrency market has been moving in conjunction with the stock market for the past few months. The link between the Bitcoin and the S&P 500 reached a 17-month high in March 2022, showing that cryptocurrency markets and stocks are moving in the same direction.

Bitcoin is a good hedge against inflation. This means that inflation does not affect the larger cryptocurrency. This may not be true every time; At least that is what the market saw when cryptocurrencies collapsed. High inflation and tighter monetary policy also affected cryptocurrency investors, leading to market collapse. These developments show that cryptocurrencies have a larger market now and are becoming more widespread.

Cryptocurrencies are not always stable

Stablecoins are supposed to maintain their value. They are supported by paper currencies such as the US dollar, gold, and even other cryptocurrencies. The collapse of Bitcoin severely affected Terra and TerraUSD. Terra’s work is responsible for this.

Terra (LUNA) and TerraUSD (UST) are the original symbols of Terra’s network. TerraUSD aims to keep its currency tied to US dollars using algorithms. So, if one wants to mint the ground money, they have to burn the equivalent dollar amount from the LUNA device. This is how the protocol keeps the price of floor tanks.

In March 2022, to add more protection to its stable currency, the creator of Terra Luna Foundation Guard (LFG), decided to add Bitcoin to its reserve, according to the website TechCrunch.com. The idea was that if something went wrong with prices, bitcoin support would help stabilize ground tanks. Unfortunately, that did not happen, the stock market collapsed, and bitcoin collapsed, leading to a full cryptocurrency collapse.

The blood bath extended to other stablecoins, such as Tether (USDT), the largest stable currency that has lost its link to the dollar. On May 12, the price of floor tanks reached an all-time low of $0.6841 at some point. This means that USDT holders have distinctive codes worth less than $1. However, the token is currently back on track, trading at $1.

Recap of The collapse of cryptocurrencies

The cryptocurrency crash has done many lessons this week. Even the best cryptocurrencies like Terra can suffer overnight losses and struggle to survive. The idea of a decentralized algorithm stable currency, like TerraUSD, looks great, but it needs a better strategy. Central stablecoins look like USDT tther, which are often criticized for insufficient cash reserves and are powerless in times of crisis.

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