It’s no secret that the cryptocurrency market has taken a hit in recent months. After reaching an all-time high in November 2021, the price of bitcoin has dropped significantly, currently sitting at around $20,000. This volatility has caused many to declare that crypto is dead. However, it’s important to remember that the market has experienced similar drops and has always bounced back. So, while the future of cryptocurrency is uncertain, it’s certainly not dead yet.
Let’s look at crypto’s historical price movement and cycles to get a better view and context to understand and predict its future movements.
Is Crypto Really in Trouble?
Cryptocurrencies are struggling. For example, Bitcoin, Ethereum, XRP, and Solana have all decreased by double-digit percentage margins. Bitcoin has decreased by 58 per cent from its high last year, and Ethereum has decreased by 60 per cent. The crash has caused economic problems. For example, El Salvador, whose president tied his country’s economy to Bitcoin, is likely to default on its debt.
Tether is a digital currency that is supposed to be worth $1 USD. However, it has been performing poorly in the market. This could cause problems for the cryptocurrency ecosystem if Tether collapses.
Tether in Trouble
Tether is a digital currency pegged to the US dollar, meaning that one Tether is always equal to one US dollar. This stability has made Tether popular among cryptocurrency investors, who use it to speculate on other digital assets. However, because Tether is centralised and backed by traditional assets, it goes against the decentralised ethos of cryptocurrency. This has led to concerns that Tether could pose a systemic risk to the cryptocurrency market.
If people lose confidence in Tether and try to cash out all at once, Tether will not have enough assets to cover all the withdrawals, and the value of Tether will go down. Even if Tether did have enough assets, if a run on the currency started, Tether would have to sell its assets at a low price, which would still hurt the currency’s value.
This means that if the crypto were to drop suddenly, it could have a domino effect on the rest of the cryptocurrency market and the economy as a whole.
The Luna Distress
The Terra system ultimately failed because the price of LUNA fell below $1, at which point the system was supposed to provide an incentive for traders to repurchase it. But because there was no tangible asset backing the currency, there was no way actually to guarantee that the price would ever rebound. As a result, the system collapsed, taking a lot of people’s money with it.
The key thing to understand is that the price of TerraUSD was kept up by printing new LUNA as necessary. This means that the value of TerraUSD is also questionable. A classic death spiral got going: Terra broke its peg and started falling, the value of LUNA plummeted, and both are now in danger of collapse.
The recent crypto crash provides some valuable lessons for investors. In particular, it is a reminder that crypto assets are still highly volatile and risky. While there may be opportunities for short-term gains, investors should be aware of the risks involved. They should also diversify their portfolios to reduce the impact of any one asset.
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