The price of Bitcoin is down more than 50% from its peak in November 2021 and has fallen more than 11% today, approaching the $30,000 mark, leaving many investors scrambling to figure out what’s going on. pass.
There are two main factors currently putting pressure on bitcoin prices, Caleb Franzen, senior market analyst at Cubic Analytics, told TechCrunch. “As liquidity is removed from the financial system, risky assets are repriced,” Franzen said.
The rising rate environment, coupled with weakening economic activity, creates a risky environment, Franzen added. “That’s a big part of why bitcoin and stocks are falling together. With bonds offering no safe haven, investor sentiment is overwhelmingly negative.
Again, this adds a recursive element to the market, where negative performance leads to negative sentiment, which leads to more negative performance, Franzen noted. “Historically negative performance, historically negative sentiment and historically accelerating returns are the primary driver for the continued sell-off.”
A number of market sources also say that the huge selloff is happening right now in tandem with the depegging of the algorithmic stablecoin TerraUSD (UST) over the past few days.
Terraform Labs (TFL) – the organization behind UST, the LUNA cryptocurrency and Luna Foundation Guard (LFG) – emptied its cash wallet of all bitcoins, approximately 42,530 bitcoins, or $1.3 billion, today today. “That [action could] add significant selling pressure on bitcoin and could drive markets lower,” Corey Miller, head of growth at dYdX, told TechCrunch.
The UST stablecoin lost its 1:1 dollar peg ratio for the second time in the past three days and fell 5.3% to 95 cents on Monday, when it should still be held extremely close to 1 $. The UST unpeg forces LFG to liquidate LUNA and bitcoin reserves to correct the UST peg to $1, Franzen said.
But UST is built to withstand shocks because it’s an algorithmic stablecoin, Twitter user stablechen, a Terra developer, tweeted. “Compare if $UST goes to $0.90 or $1.1 vs $USDT – peg bends in one and breaks in the other,” Stablechen said. “I fault TFL for creating the wrong expectations with past posts involving instant ankle stability.”
Terraform Labs, which is led by its founder, Do Kwon, announced earlier this year that it plans to secure $10 billion in bitcoins for reserves to “open up a new monetary era of the bitcoin standard”. The funds were supposed to be held in a treasury to support the UST in a decentralized foreign exchange reserve to maintain the value of the stablecoin at a fixed rate.
Kwon tweeted earlier in the day that he was “deploying more capital”, but provided no further details. He also has tweeted that “LFG is not trying to get out of its bitcoin position”, adding that “the goal is to have this capital in the hands of a professional market maker” in order to significantly strengthen liquidity around the peg UST.
If Terraform Labs were to sell its bitcoin en masse in a market that is already selling aggressively, it wouldn’t be offering ankle support, Jack Melnicka token researcher at TIE, told TechCrunch.
“They’ll just crush prices and keep bleeding,” Melnick said. “Then if they support the price it will leave everyone risking the UST and leaving them with no money in the treasury to keep the peg.”
LUNA, the token that backs UST, gets “burned” when its stablecoin deviates from its peg, Melnick said, so he tries to keep the price at $1 to keep LUNA from getting burned further, but in turn, this drives prices down further, which Melnick called a “dubious call”.
“The failure of UST will have a significant impact on the crypto ecosystem,” Simon Furlong, co-founder and COO of Geode Finance, said in an email to TechCrunch. “There is over $18 billion (UST market cap) in UST-related liquidity in the broader DeFi space – where UST is used as collateral and in LP positions – that could be wiped out and cause a ripple effect of negative outcomes in DeFi markets. .”
As the market broadly de-risks and peg rates drop, people care less about higher yield and more about safety, Melnick noted. (Anchor is a decentralized savings protocol offering low volatility returns on Terra stablecoin deposits.)
“So they started trading UST for USDC, USDT, which is backed by cash or cash equivalents,” Melnick said.
Undocking the UST will likely weaken demand for marginal or less popular stablecoins, but that would not spell the end of stablecoins in general, Furlong said. Similar to Melnick’s sentiments, if the UST peg is untrustworthy, “we will see a leak to security as users will sell UST for more trusted stablecoins like DAI, USDC, etc. which will benefit from a scenario in which UST loses its foothold,” Furlong added.
UST is currently priced at $0.963392, according to CoinMarketCap at press time.
“With the LFG essentially obligated to liquidate BTC to stabilize the stablecoin, we have a major institution pouring thousands of BTC into the market,” Franzen said. “It’s basically an algorithmic margin call.”