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UST and Terra's collapse bears resemblance to Lehman Brothers´ and damages confidence in cryptos

By Noemi Jansana / Alejandra Zamora

Date: Friday 13 May 2022

UST and Terra's collapse bears resemblance to Lehman Brothers´ and damages confidence in cryptos

(Sharecast News) - The phrase most often heard in cryptocurrency circles these past few days is something like "I'm trying to digest everything that has happened". Social networks have been filled with stories of investors caught in the Terra crisis, who have lost absolutely everything in the collapse of LUNA and the Terra dollar (UST), the two tokens of the blockchain platform. In many cases, they have also been caught up in the Bitcoin crash that resulted from this hecatomb and, despite acknowledging that "it was coming", they have not exited the market in time. Sound familiar? The episode has revived the Lehman Brothers crisis of 2008 with numerous analysts comparing what happened to a bankruptcy of the banking system.
"This collapse of one of the largest 'stablecoins' has had a strong ripple effect throughout the cryptocurrency ecosystem, with many participants questioning the actual stability of these tokens, as well as requiring a centralized authority and traditional financial markets to rescue what was considered a decentralized ecosystem," experts at Julius Baer stated.

The figures being bandied about these days are frightening. LUNA has signed its death warrant by dropping its price to less than $0.1 ($0.076 at the time of writing) and losing positions in the ranking of coins by market capitalization. It is no longer even in CoinMarketCap's top 200. Two weeks ago, on April 28th, it was trading above $90 and its all-time high, reached on April 5th, just over a month ago (!!!), was almost $120. As for the UST, it continues to agonize and does not seem to have touched ground. After trying to stabilize at around $0.5 it has eagerly fallen back below $0.2.

The shocks have been felt throughout the crypto ecosystem sending waves of panic among investors. $600 billion have evaporated in one week from cryptocurrencies. Bitcoin and numerous 'altcoins' have returned to prices not seen since the late 2020s and technical analysis suggests a correction of greater depth. Another stable currency, the Tether dollar (USDT) has lost its anchor to the dollar and has fallen to lows not seen since 2017. As for the decentralized finance ecosystem (DeFi), Terra represented the second largest ecosystem in terms of total value locked (TVL for short) at approximately $16.8 billion.

This unfolding crisis highlights the uncertainties inherent in algorithmic stable currencies (USTs) compared to their traditional fiat-backed counterparts (USDT, binance coin or USD coin). The big difference between the two types of stable tokens is that while Terra's UST is an algorithmic-type 'stablecoin' that has its own decentralized seigniorage system, USDT is a centralized stablecoin backed by fiat money, which ultimately makes it a risk to the traditional financial system.

"Although there are many different types, algorithmic stablecoins such as UST have been by far the most controversial, as no fiat currency collateral or other highly liquid assets are required to back the stability of the token," industry sources explained.

For Julius Baer, what happened with Terra is "a clear demonstration of the market's lack of confidence in the ability of stable algorithmic currencies to self-correct any arbitrage opportunities and maintain parity stability". A fact that reinforces the Swiss bank analysts' view that "regulators will increasingly focus on the decentralized finance (DeFi) space and stable, unregulated currencies."

The U.S. has set about tidying up the sector, as was made clear earlier this week by Treasury Secretary Janet Yellen, who put the spotlight on stable currencies during an appearance before the U.S. Senate. However, experts believe that increased scrutiny from the authorities will be another nail in the coffin for digital tokens, whose confidence has again been badly damaged.

"What the cryptocurrency industry needs right now is for support and enthusiasm to return regarding how digital tokens fit into our increasingly digitized lives, rather than government regulation," exclaimed Ipek Ozkardeskaya, an analyst at Swissquote Bank. However, experts agree that it is difficult to say whether the sell-off in cryptocurrencies is indicative of a long-term decline. "Crypto-evangelists will say we've been there before and these assets have not only recovered, but have soared to all-time highs," commented Myron Jobson, an analyst at interactive inventor.

"However, the environment now is very different," the expert pointed out, as markets prepare for an era of monetary tightening not seen in two decades, with a US Federal Reserve (Fed) and other central banks determined to end the era of cheap money and fight inflation. And let's not forget that Bitcoin is only 14 years into its history.

"Cryptocurrency enthusiasts may see every dip as a buying opportunity, but conviction is going to be tested, and for the average investor it is a timely reminder of the risk involved in investing in such a highly volatile asset," the expert noted.


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