The share price of the leading crypto-industry stock, Coinbase, is half what it was a week ago, falling 26% in a single day
IT HAS BEEN a vicious year for financial markets, and more punishing still for crypto assets. More than half the market capitalisation of cryptocurrencies has been wiped out since November. On May 12th bitcoin traded at around $29,000, just 40% of its all-time high in November; ether has slumped by a similar amount.
Added together all stablecoins, the largest of which are tether and USD coin, operated by Circle, are worth around $170bn. Terra, a smaller stablecoin that had a market capitalisation of $18.7bn a week ago, has unravelled in recent days. Even tether’s peg came under pressure on May 12th. The events resemble the confidence crises that have preceded every bank run.
Others, like terra, are called “algorithmic stablecoins” because they use an automated process to support the peg. But their main distinguishing feature is the way in which they are backed. Terra is backed with luna, a cryptocurrency issued by the same firm that issues terra. The theory was that holders of terra could always redeem it for one dollar’s worth of luna. A week ago, when luna was trading at $85 a piece, that meant a terra holder could redeem it for 0.0118 lunas.
It is unclear what will happen to terra now. Its market cap has sunk to $4.5bn. Its founders have supposedly propped it up by selling off some of the $3.5bn-worth of bitcoin they had in reserve, and are trying to come up with a new way to restore the peg. Its unravelling has had wider consequences. For one, the broken peg put pressure on other stablecoins, notably tether, the biggest, which briefly dipped to 95 cents on May 12th. That jeopardises the plumbing of the crypto system as a whole.
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