Bitcoin (BTC), the world’s premier cryptocurrency, has now fallen to a level below the December 2020 low as the mess, which is the UST Terra, causes tremor-like volatility shaking from whales across the cryptosphere. Today at its lows bitcoin traded around the $ 25,000 mark.
Towards yesterday’s report on the US CPI, the spirit of animals reawakened in large areas of the world of risky assets amid expectations that the report will show that the peak of inflation is behind, creating the ground for a gradual reduction of the Federal Reserve’s hawkish position. . However, contrary to expectations, the CPI report showed again hot inflation in April, pull stocks down as investors see no support for policies on the horizon as long as inflation stays near a high for decades. We continued to kill the fact that the sharp correlation of bitcoin with high beta US stocks means that cryptocurrency will not be able to recover after falling prices until it makes a broad market.
Against this background, UST Terra has played a role in damaging the prevailing mood of investors not only around the analogue of stablecoin LUNA, but throughout the cryptosphere. Honestly, this wave of liquidation feels like a “Lehman” moment for cryptocurrencies.
“People are still processing this, but this is Lehman’s moment for the crypt”
Hearing about a lot of funds that may be insolvent due to the collapse of Luna
– Frank Chaparo (@fintechfrank) May 12, 2022
As an update, TerraUSD (UST) is a stablecoin pegged to the US dollar. Terra maintains this binding by algorithmically regulating the supply of UST and LUNA. If the UST price falls below $ 1, the UST supply is burned by minting LUNA, thus restoring the peg. On the other hand, if the price of UST exceeds $ 1, LUNA is burned to expect more UST, thereby increasing the supply of stablecoin and lowering its value. Terra also plans to introduce a Bitcoin-based stabilization mechanism.
This brings us to the heart of the matter. A few days ago UST started falling from pegging to $ 1, which required Terra to burn UST by minting LUNA. However, the scale of the liquidation of the UST was such that the binding could not be restored even though large quantities of LUNA were expected at ever lower prices. This crisis has exposed the futility of issuing algorithmically adjusted stablecoins, and Terra itself seems to be moving towards the inclusion of some reserve-based mechanism as a crucial stabilization tool. In the midst of this crisis, Terra also lent $ 750 million worth of bitcoin to OTC traders, who were then asked to buy UST. This intervention also failed, exacerbating a crisis of confidence across the cryptosphere.
Well, the crisis has just hit Tether (USDT), which has also now canceled its theoretical price of $ 1, which is currently trading at around $ 0.96 as liquidation escalates.
A few days ago we noted the likelihood that bitcoin will fall lower The price level is $ 29,000 was removed, citing a number of nearby support areas, as well as the prevalence of oversold conditions. However, in light of yesterday’s CPI report and the historically high correlation between bitcoins and U.S. stocks, the capitulation rate for a sustainable recovery is now probably much lower. As seen in the snippet above, this correlation has just reached 0.71, indicating that about 71 percent of bitcoin movements are in line with the S&P 500. This correlation mode means Bitcoin and U.S. stocks will continue to face similar waves of liquidation in the near future.
Finally, bitcoin has always formed a new historical high after the surrender event. Will it be different this time? Time will tell, I suppose.