What Caused the Crypto Crash

Coins come and go, but Terra’s death has cut through the crypto community. Terra is said to be a stablecoin of the stablecoin community—a cryptocurrency that tracked the dollar. 

It is worth noting that the demise of algorithmic stablecoin TerraUSD and its sibling token Luna slashed the cryptocurrency sector’s overall trillion-dollar value by more than $250 billion. According to sources, the weekly net shift in Bitcoin volatility was the greatest in two years.

Luna may have been the most prominent victim of the crypto crash this week, but it was hardly the only one. Other currencies have begun to recover after the crash, but this still represents a loss of over US$500 million (£410 million), prompting existential questions about the future of the market.

Why did the crypto crash happen?

There is no simple answer. Several factors came into play. Here are the two prominent causes.

Bitcoin is not immune to inflation, not according to recent events

Crypto investors have long been saying that Bitcoin is a hedge against inflation, but these recent events suggest that it might not always be the case. High inflation and tighter monetary policy affected crypto investors resulting in the collapse of the cryptocurrency market. These developments show that crypto has a bigger market now and is becoming more mainstream.

The stability of stablecoins is in question because of their recent tumble from glory

Terra is the name of the cryptocurrency used on the Terra network. Terra comes from terra firma, which means solid ground. The symbol for the currency is LUNA, after the moon goddess in Roman mythology. TerraUSD, or UST, is one of two native tokens used on the network. It aims to maintain its value at $1 using algorithms; if you want to mint a new UST, you need to burn away the equivalent of LUNA. And vice versa: if there is too much UST floating around and its value drops below $1, it will be destroyed by the smart contracts automatically.

 In March 2022, the Luna Foundation Guard (LFG) decided to add Bitcoin to its reserve, according to TechCrunch.com. The idea was that Bitcoin would stabilize U.S. Terra Token (UST) trading on a crypto exchange. Unfortunately for investors and everyon else involved, that did not happen, and the stock market collapsed later that same year.

Terra (LUNA), the 11th largest cryptocurrency by market cap, is currently trading at $0.000000999967 per token, a 14.359% decline from an all-time high of $119.18 in April 2022. 

Tether (USDT), the largest stablecoin, has lost its peg to the dollar. On May 12, UST price hit an all-time low of $0.6841 at one point. That means the holders of USDT have tokens worth less than a dollar. However, the token is currently back on its track, trading at $1, according to coingecko.com.

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