• Wed. Jun 22nd, 2022

Crater of Cryptocurrencies as Terra Collapse Sparks DeFi Exodus

ByHazel R. Lang

May 11, 2022

The cryptocurrencies that underpin some of the most popular decentralized finance protocols have fallen as the collapse of stablecoin TerraUSD triggers a rush for many of the most popular tokens in the digital asset market.

DeFi favorite Avalanche plunged around 30%, while Solana fell more than 20% and Aave fell 24%. Bitcoin fared better and fell around 3.7% after falling to an almost 11-month low of below $30,000. The TerraUSD stablecoin continued its downward spiral.

“The collapse of the UST undermines confidence in all liquidity protocols,” said Aaron Brown, a crypto investor who writes for Bloomberg Opinion. “If UST can fail, maybe Aave can too. Much like when Bear Stearns failed, it brought people’s attention to the question of whether Lehman was going to fail.

Algorithmic stablecoin TerraUSD continued to spiral lower, bouncing between 20 and 90 cents. Backers of the coin are trying to raise around $1.5 billion to shore up the token after it collapsed from its dollar peg, according to a company founder who was approached about the deal.

“Is the market scared by what is happening with Terra? The answer is yes,” said Craig W. Johnson, chief market technician at Piper Sandler, over the phone. “Money market funds are important to investors and right now we are questioning the third largest money market fund in the land of crypto. People didn’t think we were going to break the ball and it clearly happened.

Terra’s troubles were the dominant story in finance all week. “Breaking an insufficiently robust or secured protocol destroys value,” said Hugo Rogers, chief investment officer at Deltec Bank & Trust. “And that has ripple effects.”

Sentiment was also dashed after data showed US consumer prices rose more than expected in April, indicating inflation would persist at elevated levels for longer. The data point also suggests that the Federal Reserve will continue on its path of aggressive interest rate hikes, creating an unfavorable environment for cryptos and other risky assets.

“There is extreme fear in the crypto market,” said Marcus Sotiriou, an analyst at GlobalBlock, a UK-based digital asset broker.

Cryptocurrencies and other riskier assets have been under pressure all year. The Fed and other central banks are raising interest rates to fight runaway inflation, creating an unfavorable environment for risky assets.

Bitcoin on Wednesday afternoon in New York was trading around $29,700. The area around $30,000 had been a “particularly sensitive area” for Bitcoin, wrote James Malcolm, head of FX and crypto research at UBS. This is where the mining economics turns negative, “which could potentially lead to increased coin sales by this key cohort,” he said. He added that long-term accumulators like MicroStrategy Inc. are starting to fall below historic breakevens.

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