By Ryan Browne CNBC
Bitcoin plunged below $27,000 on Thursday for the first time in more than 16 months, fueled by the more than 99% drop in Luna, a top cryptocurrency, and the stablecoins –stable coin- TerraUSD, to which it is tied.
The financial crisis, which has been unleashed in the last 72 hours and shows no sign of stopping for now, has been reflected on social networks – under labels such as #cryptocrash either #MOON– with messages from investors who have claimed the loss of their savings. Added to this drain are fears of rising inflation and doubts and fear of contagion among investors.
The bitcoin price fell as low as $26,595.52 on Thursday morning, according to data from Bitstamp. It is the first time bitcoin has dipped below the $27,000 level since December 30, 2020.
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As of 1:30 a.m. ET, bitcoin was trading at $27,061, down 15% in the last 24 hours.
Ether, the second largest digital currency, sank to $1,789 per coin. It is the first time this digital currency has fallen below $2,000 since July 2021.
Ether was last down 23% at a price of $1,852.
Investors are fleeing cryptocurrencies at a time when stocks have plunged from the heights of the coronavirus pandemic on fears of rising prices and deteriorating economic prospects.
US inflation data released on Wednesday showed prices for goods and services soared 8.3% in April, more than analysts expected and close to the highest level in 40 years.
Also weighing on the minds of operators is the drop in stablecoin TerraUSD, founded by the company Terraform Labs, based in Singapore, and which was created to maintain, through algorithms, parity with the dollar, an equivalence that has been interrupted in the midst of this crisis.
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TerraUSD, designed to always trade for a dollar, plunged below 30 cents on Wednesday, shaking investor confidence in the so-called decentralized finance space.
Unlike other stablecoinsTerraUSD is not backed by other assets, but instead maintained its peg to the dollar through a complex algorithm linked to Luna, an unbacked cryptocurrency.
The stablecoins they are like the bank accounts of the cryptocurrency world, barely regulated. Digital currency investors often turn to them for safety in times of market volatility.
As explained by the Swiss bank Julius Baer, it is “extremely” important that the stablecoins remain linked to their fiduciary equivalent as “slippage of even a few basis points can have detrimental effects on investments linked to it”.
But TerraUSD, a stablecoin “algorithmic” that relies on code rather than cash held in a reserve, has struggled to maintain a stable value as investors have flocked out.
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This Thursday morning, TerraUSD was trading at about 62 cents, still well below its $1 target.
Luna digital currency, another TerraUSD token that has a floating price and is meant to absorb TerraUSD price shocks, has lost 97% of its value in 24 hours and has come to be worth only 30 cents, even less than TerraUSD.
Investors are spooked by the implications for bitcoin. Luna Foundation Guard – a fund created by Terra creator Do Kwon – had amassed a multi-million dollar stack of these cryptocurrencies to help support TerraUSD in times of crisis.
The fear is that Luna Foundation Guard will sell a large part of its bitcoin holdingss to shore up his weakened stablecoin. It is a risky bet, especially since bitcoinn it is an incredibly volatile asset.
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To the fears of investors was added this Thursday the fall in the value of Tether, the largest stablecoin of the world.
The token fell below 99 cents. Economists have long feared that Tether may not have the necessary amount of reserves to strengthen its peg to the dollar in the event of massive withdrawals.