Confidence in “Decentralized Financial System” Emerges
Bitcoin was once touted by some as a “safe-haven asset” and “inflation hedge” comparable to gold, but the performance of the bitcoin market since the Russia-Ukraine conflict has made these shibboleths no longer hangable. As of 10:50 a.m. on May 17, the latest price of bitcoin was $29,988. So far in 2022, bitcoin has plunged more than 35 percent, and evaporated by more than half compared to its historic high of nearly $69,000 in November 2021.
The cryptocurrency market has seen dramatic shocks over the past week, with bitcoin and ethereum continuing to plunge, falling to $25,401 on May 12, the first time bitcoin has fallen below $26,000 since Dec. 26, 2020, causing more than $200 billion to be wiped off the value of global cryptocurrencies in a single day. The situation got even more out of hand with the collapse of stablecoin TerraUSD (UST), whose sister token Luna coin plummeted over 99% in value to near zero!
One concept that needs to be popularized here is that UST is a so-called “algorithmic” stablecoin in the cryptocurrency market. In the crypto world, stable coins have always served as a bridge between the real world and the crypto world, and decentralized algorithmic stable coins are known as the “minting power” of crypto natives. The UST was supposed to be tied to $1.
The UST is supposed to be “stable pegged” to $1, and it keeps the price anchored at $1 by balancing supply and demand with its floating sister token, Luna. Each time a UST is minted, the $1 equivalent of Luna is destroyed or removed from circulation, and vice versa. The root of this mechanism to function properly is that the market value of Luna is higher than that of UST, and once an extreme situation occurs resulting in an inverse market value, Luna will not be able to achieve price anchoring and a downward death spiral will occur.
At one point on May 11, UST plummeted to less than 30 cents, while the value of Luna coin used to absorb the UST price shock evaporated by 99% to less than 1 cent (just a month earlier on April 5, Luna coin value had reached a high of $119.50). Some blockchain analyst firms estimate that UST and luna holders have lost a total of $42 billion in the past week.
Some cryptocurrency market analysts point out that stablecoins are like bank accounts in the virtual currency world, investors would consider them relatively low risk and volatility, and previously stablecoin USTs were pegged to the US dollar, but the recent crash conditions have put the currency in trouble for decoupling, showing that investors have lost confidence in the decentralized financial system.
Currently, the crypto industry is full of pessimistic comments and fears of another “virtual (mock) currency winter”. Jay Hatfield, chief investment officer at Infrastructure Capital Management in New York, sees this as the beginning of a cryptocurrency downtrend, predicting that bitcoin will fall to $20,000 by the end of this year; in the worst case scenario, it may fall to a pre-epidemic low of $10,000.
Of course, there are still plenty of people who remain bullish on the cryptocurrency market. Analysis by cryptocurrency research firm Messari suggests that there is not much obvious selling pressure at the moment, “in the sense that the market will see this as a bullishness.” And Wavefield TRON founder Sun Yuchen said in an interview yesterday, “I still believe in algorithmic.