- Is it signaling the fall of cryptocurrency?
Is it signaling the fall of cryptocurrency?
The cryptocurrency market began to tumble with the unexpected collapse of Terra and Luna coin (a Korean cryptocurrency). The price of the Luna coin has dropped 99.99 percent since the beginning of May, from $119 to $0.00003- such a drop is not unusual, but the fact that the Luna coin had the 10th largest market cap in the cryptocurrency market alarmed the public, resulting in panic selling and a drop in major cryptocurrencies like Bitcoin and Ethereum, which have reached their lowest prices since January and July 2021, respectively.
Terra coin is a type of stablecoin, meaning that the coin is ‘pegged’, or kept a constant exchange ratio, with another commodity or currency. There are mainly two methods to peg a stablecoin. The first is to have a large reserve of commodities or currencies, such as US dollars, gold, or other cryptocurrencies, which can be exchanged with the coin if needed, securing the value of the coin. The second is to establish an algorithm that controls the supply of the coin, maintaining its cost. Terra coin pegged its value to $1 worth of Luna coin, and the institution used the second method to maintain the supply of Terra and Luna coins.
However, at the beginning of May, the algorithm failed to peg the cost of Terra coin, causing the public to sell their coins. This further decreased the cost of both Terra and Luna coins, creating a positive feedback loop and panic selling. Because the institution did not have enough reserves of money, they were not able to protect the cost, resulting in such an unprecedented collapse.
The exact reason for this crisis is still unknown - it can be due to a short attack, an intended scam, or even just a systematic problem - but indeed, it questioned the public about whether stablecoin, a newly rising type of cryptocurrency that Luna and Terra coins are part of, is stable or not. Some critics even argue that cryptocurrency itself is a giant Ponzi
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