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Fear in the crypto market due to the steep fall in the stablecoin Terra

Fear in the crypto market due to the steep fall in the stablecoin Terra
Written by Arindam
Fear in the crypto market due to the steep fall in the stablecoin Terra

TerraUSD, the fourth-largest stablecoin by market capitalization, lost nearly a third in value on Tuesday. This has created an atmosphere of fear among crypto investors. This was also one of the reasons why the largest cryptocurrency, Bitcoin, fell below $30,000 for the first time in 10 months.

Stablecoins are cryptocurrencies that attempt to link their market price to a reserve asset such as gold or common currencies. These are more commonly used for digital transactions that involve converting virtual assets into real assets. USD Coin, Tether and Binance USD are some of the popular stablecoins, which are pegged to the US Dollar. Stablecoin, a rapidly growing version of crypto, has emerged as a major medium of exchange. It is often used by traders to remit funds. It is easy to exchange major stablecoins for bitcoin or other cryptocurrencies. TerraUSD, touted as an algorithmic stablecoin, broke its 1:1 link with the dollar on Tuesday. According to price site Coingecko, it fell to $0.67.

Other stablecoins have reserves in common assets but TerraUSD maintains it through an algorithm that controls supply and demand using Luna, another balancing token. Luna Foundation Guard said in a tweet on Monday that it would maintain TerraUSD’s linkage with the dollar through a $1.5 billion loan to over-the-counter trading firms. Half of this loan will be in bitcoin and half in TerraUSD. Justin Anethan, Amber Group’s sales director in the digital assets business, explained that using bitcoin as a reserve has made it difficult for TerraUSD. Selling in both the tokens is leading to the downside.

On Tuesday, the price of bitcoin fell below $30,000 for the first time in 10 months. Along with this, the shares of technology companies have also declined. The decline in Bitcoin is also causing a selloff in TerraUSD. QCP Capital said that bitcoin is at an important support level. A fall in this and other factors could increase risk for TerraUSD.

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Arindam

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