What does the current crypto crash indicate for the future of cryptocurrencies?

With cryptocurrencies trading lower today in the wake of TerraUSD’s collapse and the most volatile week of Bitcoin trading in at least two years, the question that has arisen is why the current cryptocurrency crash occurred?

It is important to note that the extinction of the algorithmic stablecoin TerraUSD and its sister token Luna hit more than $ 270 billion of the crypto sector’s total trillion value. The weekly net change in Bitcoin volatility was the highest in the two years, according to reports.

Luna was by no means the only victim during a week where cryptocurrencies fell by 30%. Some have recovered to some extent, but this still represents a total seven-day loss of over $ 500 million (£ 410 million), raising existential questions about the future of the market.

What triggered the current cryptocurrency crash:

Interestingly, the current crash was possibly triggered by a financial “attack” on stablecoin Terra (UST), which is supposed to match the US dollar but is currently trading for only 18 cents and its partner currency, Luna, subsequently collapsed.

Such an attack is extremely complex and involves placing several trades on the crypto market in an attempt to trigger certain effects – which can give the “attacker” significant gains.

In this case, these deals led to the collapse of Terra, which in turn also brought down the partner coin Luna. Once this was noticed, it caused panic, which in turn triggered market withdrawals, which then caused further panic. Some (but not all) stablecoins rely heavily on perception and trust – and once this is disturbed, major cases can take effect, according to the news agency PTI.

In addition, the recent large declines in cryptocurrencies have questioned whether stable coins are stable. This is relevant because they are designed to have virtually zero volatility by maintaining a “link” to any other underlying asset.

The effects seen this week spread to the entire crypt space. Even the leading stable currency Tether lost its peg, down to 95 cents on the dollar, which may indicate the need for regulation.

Where is the crypto-secure space?

It is important to note at this point that how investors react will be the key to the future of cryptocurrencies. With panic and despair due to comparisons of this crash with a traditional run on the banks, investors can do more harm than good. A more accurate comparison is with stock market crashes where investors worry that the stocks and shares they hold may soon be worthless. And so far, the reaction to this cryptocurrency crash indicates that a large proportion of crypto holders view their investments in a similar way.

With many investing in cryptocurrencies because they thought it would make them richer. This belief has undoubtedly shaken. But another motivation for investing in cryptocurrencies may be a belief in their transformative nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchange.

For many investors, however, any increase in the value of a cryptocurrency is a demonstration of the growing power of cryptocurrency over traditional money. But in the same way, a significant decline in the value of crypto is not just a monetary loss – it is an ideological one.

(With input from agencies)

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