Cryptocrash

Late last week saw some carnage in crypto markets - dubbed the crypto crash. We've covered cryptocurrencies and their associated technologies, such as NFTs many times.

We've previously written about cryptocurrencies and how unstable they are in terms of price. They really are very volatile which makes them great for speculators when the prices rapidly rise, but not great as a long-term investment. And, of course, there is the astronomical energy usage associated with “proof of work”-based mining.

Over the last week the price of Bitcoin has fallen by 30%, and is down to levels similar to 2020.

As part of the crypto ecosystem there's the concept of a stablecoin - which is meant to be a type of cryptocoin that is stable in value - that is, its value remains constant, being tied to, for example, the US dollar. As an example, holding 100 of these stablecoins should equate to $100 USD. That's the theory, at least.

The way stablecoins should work is that they usually have actual cash backing them. Companies running stablecoins are meant to have a backing of the equivalent amount of cash - but as the industry is unregulated, there's no way to verify these claims.

Here's a graph of the TerraUSD stablecoin over the last month:

As you can see, it's been stable against the US dollar since its original release, until the last few days. This is what's called an un-pegging event. It's no longer pegged to the US dollar. During the events of last week, trading in the coin was shut down so that the company could figure out how to deal with the situation.

This all matters because stablecoins are supposedly a way of safeguarding money that is used to move in and out of volatile crypto markets. Essentially, they've been treated like a bank account, and assumed to be as safe as one. This is a problem if you've put money you can't afford to lose into a so-called stablecoin. Or worses, you spend your stablecoin to purchase a volatile currency that then crashes...

Terra also has its Luna coin which fell from being worth $116 USD in April to 0.049 cents as I write this today! The Luna is connected to the stablecoin in a way that was designed to ensure the long-term growth in value - essentially buy “burning” Luna when the UST stablecoin was purchased.

This is all extremely complex stuff (for more detail, see this article), and it's not clear exactly what the triggers were for the collapse. There's some speculation (no pun intended) from well-informed people that the crash could have been because of an attack.

The crypto market is unregulated, which makes it essentially a Wild West playground, and potentially susceptible to hackers and others with malicious intent. I'd advise most people to steer well clear!