Crypto’s Tragic Week: How An Algorithm Ignited Panic and Crashed the Market

In early May, a Moon It cost more than $80 (It was worth 118 at the beginning of April). price today not reaching cents dollar

This bitcoin dropped below $30,000It was worth nearly double less than a year ago. Shares of the main cryptocurrency exchange, Coinbase, fell and hit historical lows, according to data collected by El Periódico de España.

and all in a matter of five days. The world of cryptocurrencies had a tragic week.

“It was a perfect stormFernando Gutiérrez, analyst and investor in crypto projects, said, “Ratios are rising and inflation is freeing up. Markets outside crypto have also collapsed: most stocks in the Nasdaq have fallen. And above all, Luna’s collapse made it worse.”

In other words, the external factors of the real economy – inflation, interest rates and business results – were combined with those of the cryptocurrency market. Luna crashed because its design, which relies on an algorithm to maintain stability, failed..

There are people saying this on Reddit, a forum with a subforum dedicated to Luna. They invested their savings there. relying on the project. A user left a list phones to prevent suicide from many countries, because people have testimonies. He lost everything in one night.

“The panic was so strong that it drove the rest down,” explains Diego Morín, an analyst at IG Spain. “Now there will be those who say it is. end of cryptocurrencies. It won’t. But those pegged to a stablecoin [stablecoin] they can be attacked. positive, maybe speeding up the regulatory framework“.

cursed algorithm

Most cryptocurrencies (including bitcoin) are valued as follows: supply and demand: As with other unregulated assets, the price rises when demand increases (more people buy) and falls when supply increases (more people sell).

that makes them extremely volatiletheir prices fluctuate so often that even a tweet from Elon Musk has people screwing up or hitting them as they react.

But Luna’s surgery was different. this crypto tied to a stable currency (called UST) To avoid such fluctuation.

stable currencies or stablecoins, cryptocurrencies the value, in turn, is linked to that of a legal tender currency.; dollars in this case. The idea is that a stable currency is always worth one dollar.

In the case at hand, Luna is cryptocurrency and UST is stable currency. And until disaster struck, the target was UST = $1.

To maintain parity with the dollar, other stablecoins have real money reserves in cash. But UST doesn’t do it that way. Equivalence with dollars is automatically achieved through an algorithm. This creates and destroys Luna cryptocurrencies to try to protect it.

Investors are interested in this system because if parity deviates (UST falls below one dollar) they can make money by buying and selling Luna to offset it.

And so it was until the equivalence was ‘broken’:

Gutiérrez has a thread on Twitter describing the factors that caused the mechanism to break down. loss of investor confidence (They’re selling UST, the Luna’s price is falling and the dollar’s equivalence is deteriorating). There are also people in the crypto community who believe this is a problem. coordinated attack.

“UST sales are known to come from a single actor. I don’t know if it was coordinated, but it’s definitely intentional,” Gutiérrez says.

As if that wasn’t enough, the creators of UST/Luna recently made changes to the system, buy bitcoin to use as a backup in case the equivalence (which the algorithm should protect) deviates. These changes are not quite finished: they are only a few weeks away.

When it broke down and the algorithm was unable to fix such a large volume of sales, they resorted to these reserves: they ‘manually’ sold the bitcoin to buy the UST and save on its value. But that didn’t work and further increased bitcoin’s decline, which led to the decline of everything else.a vicious circle that drags everythingGutierrez says.

“It is unclear how many bitcoins they are coming to sell or at what price,” the expert adds. “This defense with Bitcoin worsens the market situation“.

Even so, it goes on relatively this ‘crypto crash’ happened less than in 2014One of the world’s most popular cryptocurrency exchanges, Mt. When Gox collapsed. Investors lost 5% of the market’s value at that time. Now, the loss has reached ‘only’ 2%.

“Everything is in the Air”

The United States Department of the Treasury drew attention to stablecoins months ago and asked Congress for legislation requiring its issuers to do so. meets the same requirements as regular banks.

After Luna’s collapse and the drag it caused, the Treasury secretary called: Speed ​​up this edit.

“Over the past few days, we’ve seen a real-life demonstration of stablecoin risks that are the same as we’ve seen for centuries in times of crisis. bank run“, he said in statements collected by the New York Times.

“Cryptocurrencies theory ‘wait’ [aguantarlas, no vender en momentos de pánico]. This has risks. As there are those who panic and say that bitcoin will drop to 20,000 euros, Who gets rid of them so as not to lose all their capital and the price drops even more“, says IG analyst Morín.

According to Morín, the current situation will accelerate regulation. “We won’t know the whole truth about what happened, but I think it’s a before and after. We’ll see if cryptocurrencies recover,” he says. “But at the same time, everything is like mud. The current context is complex and the market fears a recession“.

Gutiérrez adds that Luna’s fall has affected Bitcoin and other cryptocurrencies for as long as it has existed. “a general loss of confidence. It is feared that the collapse will drag others down as well.” Tether, the world’s largest stablecoin, also fell below the dollar this week as investor panic spread. This analyst believes there may be further declines. cryptocurrencies will “survive as they have always done”.

Meanwhile, Terra’s creator – a Korean named Do Kwon – has proposed a series of changes to rebuild the currency and promised to “keep making noise”. The rest of the cryptocurrencies rebounded a bit on Friday, but bitcoin Stays below 30,000 euros and marks minimums since 2020.