Once we all thought and strongly believed that crypto won’t crash, or that the world events don’t apply to cryptocurrency. But last week proved us wrong. They do apply to crypto more than ever. One of the biggest drops or crypto crashes in history was recorded last week where some currencies such as Luna which once traded above 100 USD fell below one dollar. Millionaires were instantly broke, people went from riches to rags due to this unexpected situation.
Why did it crash?
There isn’t one specific reason why we faced a crypto crash, however, there are multiple reasons the crash occurred. The main reasons will be the rising inflation rates, interest rate hikes, and especially the ongoing geopolitical instability caused by the Ukraine war. Consumer prices had been rising for a long time faster than many economists would have presumed. And the US interest rates were hiked half a point which is the first time it has happened in 22 years.
Bitcoin is a risk asset and even though it has been long-touted by supporters as an inflation hedge. It is much less correlated than gold, which is the most notable store of value. Bitcoin followed the majority of the cryptocurrencies that tend to follow tech stocks rather than an inflation hedge. In the past few weeks, many of the tech stocks took a dive as the Nasdaq closed with 4% down on Monday and then another 3% further down by Wednesday. However, we saw a slight recovery on Friday. This is another reason that affected the crash.
UST loses its Pegg
There was another reason turn of events that shook everyone. And that is that USDT the cryptocurrency which was pegged to the US dollar at $1 lost its Pegg and crashed.UST traded as low as 13cents and its sister currency LUNA became nearly worthless overnight. LUNA was once a currency that traded well over 100 USD and it was $80 a week early before it crashed and became a worthless cryptocurrency. So why did this crash happen?
As we know UST has pegged itself to the US dollar but the US dollar has assets such as Bonds but the UST does not have any such source to back its value. The only way that UST maintained its value is through a complicated system of mining and burning tokens. In simple theory, a UST token is created by destroying some of its related cryptocurrencies such as LUNA. The reason that they were unable to maintain the rate of 1usd is that the crypto market became extremely volatile and especially coins like LUNA were unable to maintain stability, and there was a lot of panic selling by the people which dragged the value of the currencies further down.
We would expect that this is a temporary set back but in the case of luna, the world’s largest cryptocurrency traders have delisted Luna and UST which makes the credibility of the token very doubtful even if it was to rise to its former glory.
How the crypto crash affected people
The cryptocurrency was once seen as the future of all financial transactions. Many people invested their entire life savings, their retirement plans, and even their college funds. And don’t get me wrong there were people who became millionaires and some even billionaires thanks to cryptocurrency. But at the end of the day, every investment has a risk. And every single crypto investor had to pay the price for that last week. Many coins were down by over 100% which surely made a lot of people break overnight.
There were many people who believed that investing in different cryptocurrencies is all part of “diversifying” but in this case they were wrong. This huge market crash wasn’t predicted by anyone and it proved to us that having an unregulated currency system with no attachment to any real-life asset can have its repercussions.
Crypto crash effects El-Salvador
If you take a look at the El-Salvador government. They had invested in cryptocurrency heavily. They were the world’s first country to make bitcoin a legal tender. And the government despite the advice of the IMF decided to cover its national debt by investing in cryptocurrencies. The administration had spent well over 103million USD in purchasing bitcoin and as of last Thursday, their value was approximately 67 million. This means the country’s net worth had tanked by $36 million. To make matters more alarming the president of El Salvador tweeted that they just “bought the dip” by buying 500 bitcoin at $30 000. Some people criticize this policy heavily and there are even anti-bit coin protests in the country.
This is how the crypto crash affected us and even entire economies. So keep in mind that you should always diversify your portfolio and take calculated risks. And you should always know the difference between trading vs investing. If you are a teenager who is having second thoughts about crypto here are some ways to make money online with a low startup cost.