Cryptocurrencies continue in free fall | Bitcoin fell another 3 percent this Wednesday and stood at 29 thousand dollars

The cryptocurrencies continue to register significant volatility. The price of bitcoin fell more than 3 percent this Wednesday to settle around 29 thousand dollars. This is a figure that is less than half the value that this digital currency had at the end of 2021. Last November it had come to trade above 65 thousand dollars.

The Investors’ questions regarding cryptocurrencies and their price are mainly explained by changes in international financial conditions. Until now, cryptocurrencies had taken advantage of a time of extraordinary global liquidity.

The rise in interest rates in the United States – which is estimated to continue to advance this year and possibly the next to approach levels close to 4 or 5 percent – increases the cost of financing in hard currency and reduces incentives to make investments in this class of projects in which future profitability is uncertain.

Earth Moon

This new international financial scenario is also combined with another blow that digital currencies received in recent weeks. The tremor deepened fall of one of the main stable cryptocurrencies (stablecoins) of the ecosystem. These are Terra Luna and Terra USD, a project that in a few months had exceeded 40 billion dollars in capitalization and that in less than three weeks almost completely vanished.

Mainly stablecoin type currencies seek to maintain the value of some real world asset. For example, Terra USD assured that it would be able to maintain a price equivalent to that of the US dollar, with which each one of the Terra USD should be exchangeable for 1 dollar.

Over the past year this has worked well and the project has been growing with more and more participants demanding the coin and even using it to make investments. There were proposals to deposit something similar to a fixed term deposit in Terra USD that yielded 20 percent in dollars per year, a rate of return that was almost triple that of US inflation.

But the last month the Terra stablecoin suffered a speculative attack that caused the parity against the dollar to drop. Each Terra USD instead of being exchanged for 1 dollar, now costs 10 cents. In other words, it lost 90 percent of its value in weeks.

Large investment funds participated in this speculative attack using financial derivatives, including Blackrock, the world’s largest fund manager. It is estimated that the bankruptcy of Terra would have brought this investment fund profits of more than 1,000 million dollars (thanks to its short placements).

stablecoins

In general terms, there are three ways to support a cryptocurrency of the stablecoin type. The first, as was the case with Terra, is with algorithms that generated incentives for the value of a Terra USD to return to close to 1 each time it increased or fell from that price.

The algorithms worked well in periods of stability but were unable to withstand the sell-off that broke out in May and led to its bankruptcy.

The other way to generate a dollar-pegged stablecoin is with a direct backing of the real asset. For example, it is the case of Tether, which claims to have for each digital currency issued 1 dollar bill (or equivalent US Treasury bonds) to guarantee its price. In recent days there has been a speculative attack against this project, the price of the coin fell to 95 cents on the dollar but resisted to return to levels close to 1 dollar.

In the cryptocurrency universe, it is considered that a hypothetical drop in the Tether dollar could imply a point of no return for the rest of the cryptocurrencies, including bitcoin and ethereum.

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