Bitcoin price is down over 50% from its November 2021 peak and is down over 11% today, approaching the $30,000 mark, leaving many investors scrambling to figure out what is going on.
There are two main factors driving the pressure on bitcoin prices right now, caleb frankensenior market analyst cubic analysishe told TechCrunch. “As liquidity is withdrawn from the financial system, the price of risky assets changes,” Franzen said.
The rising rate environment, coupled with weakening economic activity, is creating a risk-averse environment, Franzen added. “This is largely why both Bitcoin and stocks are falling together. Since bonds do not offer a 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 yield, historically negative sentiment and a historical acceleration in yields are the main driver of the continued sell-off.”
Several market sources also say that the big sell-off is taking place right now in conjunction with the de-pegging of algorithmic stablecoin TerraUSD (UST) in the past few days.
Terraform Labs (TFL), the organization behind UST, LUNA cryptocurrency, and Luna Foundation Guard (LFG), emptied its treasury wallet of all your bitcoin, about 42,530 bitcoins, or $1.3 billion, today. “That [action could] add significant selling pressure on bitcoin and it could drag markets down,” Corey Miller, head of growth at dYdX, told TechCrunch.
The UST stablecoin has lost its 1:1 dollar parity ratio for the second time in the last three days and fell as much as 5.3% to 95 cents on Monday, when it should always stay very close to $1. The unpegging of UST is forcing LFG to liquidate reserves of both LUNA and bitcoin to correct UST’s peg to $1, Franzen said.
But UST is designed to withstand shocks because it is an algorithmic stablecoin, Twitter user stablechen, a Terra developer, tweeted. “Compare if $UST goes to $0.90 or $1.1 vs. $USDT – the peg bends at one and breaks at the other,” Stablechen said. “I blame TFL for creating the wrong expectation with previous releases implying instant peg stability.”
Terraform Labs, which is run by its founder Do Kwon, announced earlier this year that it planned to raise $10 billion worth of bitcoin for reserves to “open a new monetary era of the Bitcoin standard.” The funds were supposed to be held in a treasury to back UST in a decentralized foreign exchange reserve to keep the value of the currency stable at a fixed rate.
Kwon tweeted earlier today that it was “deploying more capital” but did not provide further details. He too 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,” thereby significantly strengthening liquidity around the UST parity.
If Terraform Labs is selling your bitcoin en masse in a market that is already selling aggressively, I wouldn’t offer peg support, jack melnicka token researcher at The TIE told TechCrunch.
“They’re just going to crush prices and continue to bleed,” Melnick said. “So if they support the price, it will allow everyone else to de-risk UST and leave them with no money in the treasury to maintain parity.”
LUNA, the token that backs UST, “burns” when its stablecoin deviates from its parity, Melnick said, so it is trying to keep the price at $1 to protect LUNA from burning further, but in turn , is causing prices to fall further. , which Melnick called a “doubtful call.”
“The UST failure will have a significant impact on the crypto ecosystem,” Simon Furlong, Co-Founder and COO of geode financehe said in an email to TechCrunch. “There is more than $18 billion (the market capitalization of UST) in UST-related liquidity within the broader DeFi space, where UST is used as collateral and in LP positions, that could disappear and cause a domino effect of Negative results across all DeFi markets. .”
As the market is generally derisking and Anchor rates fall, people care less about higher yield and more about safety, Melnick said. (Anchor is a decentralized savings protocol that offers low-volatility returns on Terra stablecoin deposits.)
“So they started switching from UST to USDC, USDT, which are backed by cash or cash equivalents,” Melnick said.
The decoupling of UST will likely weaken demand for fringe or less popular stablecoins, but it would not spell the end of stablecoins in general, Furlong said. Similar to Melnick’s sentiments, if UST pegging cannot be trusted, “we will see a flight to safety as users will sell UST for more reliable stablecoins like DAI, USDC, etc., which will benefit of a scenario where UST loses its parity,” Furlong added.
UST is currently priced at $0.963392according to CoinMarketCap at press time.
“With the LFG essentially forced to liquidate BTC to stabilize the stablecoin, we have a major institution dumping thousands of BTC into the market,” Franzen said. “This is essentially an algorithmic margin call.”
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