The turmoil in the crypto market is getting wilder. In another hard-hitting move, the Bitcoin price briefly fell below the $ 30,000 mark today. However, during the recovery in the overall market, the cryptocurrency was also able to jump out of the chart’s technical support zone in the range of $ 30-28,000 and settle again. The price is currently trading at $ 31,500.
Source: trade show
However, the downward pressure since the beginning of the year has pushed the Bitcoin price to the long-term support level from the beginning of 2021. An initial brief technical confirmation could be made with the clear bottom. Now, however, this area comes into focus. If the price returns and does not confirm this support, it will first target $ 28,000 and then the 200-week long-term trend that has historically been a reliable signal of a bottom in a bitcoin bear market. The indicator is currently trading at around $ 22,000.
Terra Luna stablecoin shocks the market
Further concerns in the crypto market have been raised by the Terra Luna project, a blockchain infrastructure believed to be one of Ethereum’s biggest competitors, which has designed its own US dollar stablecoin backed by Bitcoin reserves and the native token “Luna” .
The token has collapsed by 64 percent during the broad market correction in the last 7 days and has thus also flown out of the 10 largest crypto projects by market value. As a result, stablecoin UST lost its bond to the US dollar and temporarily fell to a price of only 66 cents.
The Terra Luna Foundation behind the project has taken steps to restore the bond. To do this, some of the multi-billion dollar Bitcoin holdings that the project had acquired over the past few weeks to create additional coverage for the stack coin were sold on the market. The actions caused the price of UST to return to $ 0.90, however, the stack coin has not fully regained its bond to the dollar so far.
How does VAT work?
UST is a so-called algorithmic stablecoin. It works in conjunction with the Luna Token, which aims to maintain a $ 1 price using Mint and Burn mechanisms. In theory, this is to ensure that traders can always exchange $ 1 UST for $ 1 LUNA, which has a floating price and is intended to act as a kind of shock absorber for UST price volatility. When Luna is replaced with UST, the Luna token is “burned” and restored.
In practice, this obviously does not always work, as we have now seen. The sharp divestment in the overall markets has led to an imbalance in the relationship between Luna and UST. This could be exploited for significant arbitrage trading that led to the decoupling of stack coins to the US dollar price. As there was temporarily less Luna than UST, UST could no longer be exchanged one-on-one in dollar terms on Terra Luna’s primary market.
How should investors react to the situation?
The turmoil in the broader crypto market stems from the overall uncertainty in the financial markets. In recent months and weeks, much capital has flowed out of altcoins, as risk appetite in the markets has fallen extremely since the announcement of the US Federal Reserve rate hike and subsequently due to the outbreak of the Ukraine war. Risk-on assets are therefore increasingly being thrown out of the portfolios.
The problems at Terra Luna are a symptom of the wide market sales and also an example that most crypto projects are still in their early stages with a lot of room for error. Investing in the altcoin market always comes with significant risks, as this recent example clearly shows.
Bitcoin itself is also still very closely linked to the development of the financial market at a higher level, but the $ 30,000 mark has proven to be an important support zone at the moment. The market schedule for the next few months is pre-programmed. The further rise in interest rates, inflation and geopolitical developments will set the tone. As the risk of a global recession is high, there is still a downside for the stock markets and due to the correlation with this also for the crypto sector.
Further price hikes to the $ 30,000 mark are likely – should these again prove to be a confirmation of the support zone, a bottom formation may follow in the next few months. Otherwise, the 200-week trend around $ 22,000 remains the next target for a long-term entry point.