Cryptocurrencies: Can Investors Regain Confidence After the Cracks?

In just two years, cryptocurrencies have seduced many new investors, whether it be individuals, institutions like Tesla or even countries such as El Salvador. All of these virtual currencies had thus reached a total value of $ 3,000 billion in capitalization by November last year. But since January, under the combined effect of rising interest rates in the US and the fall in shares of technology companies, the most important of these cryptocurrencies, bitcoin, has lost 60% of its value.

And an even more violent crash affected UST, a “stablecoin” in itself linked to the cryptocurrency luna. As the name suggests, this digital token promised, in normal times, a backing of its value to the US dollar, according to a stable parity of 1 UST = 1 dollar. Its success was largely due to the Anchor platform, a protocol that enabled investors to generate a stable interest rate of almost 20% by multiplying trading around UST. So much so that this stablecoin in value had become the third in the crypto universe.

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But at the time of writing, at the end of May, UST was trading at only about 6 cents of the dollar, a loss of 94% of its value! The luna, meanwhile, had dipped 99.99% and dropped in a week from $ 87 to $ 0.0001. In just a few days, more than $ 40 billion of capitalization thus evaporated. How to explain such a correction? It should be noted that unlike the best known stack coins, UST was not based on the value reserves that the company constituted at its inception, but on an algorithm that made it decentralized and independent of any entity.

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To maintain parity, an arbitration mechanism between luna and UST had been devised. In detail, if UST fell below the dollar, each user could destroy 1 UST in exchange for 1 dollar luna. Conversely, if UST climbed over the dollar, it was necessary to burn 1 dollar luna to obtain 1 UST in exchange. But all that was needed, on May 7, was a loss of confidence, driven in part by the fall in bitcoin, so that massive sales of UST could take place and that stablecoin could no longer secure any anchor. Despite the efforts of the Luna Foundation Guard (LFG), the non-profit organization responsible for its development, UST is never expected to return to its original parity.

It is hard to say whether this disaster could have been avoided. The common protocol for luna and UST had in fact experienced a parabolic increase without sufficient reserves being provided to trade in the event of massive sales. It was also implemented on several blockchains and on many exchange platforms, making it increasingly complicated to manage pricing.

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But in every crash there are winners and losers. Venture capitalists who had bet very early on on the luna and UST were thus able to generate a profit. Specialized exchange platforms such as FTX, Binance or Curve, which have recorded extraordinary sales volumes, associated with panic among holders, are also winning, thanks to the exchange fees and the generated position liquidations. The whistleblowers who had predicted the fall of the luna are certainly the ones who benefited most from this fall, through their media exposure, but also from the speculative gains achieved.

The losers are investors who got stuck with luna, those who had USTs and could not get rid of them in time, traders who bet on the luna’s progress and finally companies that went through Anchor. Moreover, this crash will put stablecoins in the eyes of regulators, further highlighting distrust of the sector.

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A rescue plan through the creation of a new blockchain is certainly planned, but once trust is lost, can we really regain it? Both the Covid crisis and the war in Ukraine have deeply affected our economy, and many are talking about a possible recession. It will therefore be instructive to see this new ecosystem of cryptocurrencies work, after these serial crashes. Will it continue to follow the stock indices or stand out from its resistance and come out stronger?

* Artem Sinyakin is a co-founder of the consulting firm Oak Invest

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