Bitcoin loses 32 percent in eight days – This is behind the cryptocurrency

A smaller digital coin is owed: cryptocurrency within a few days: confidence is shaken – the reason is called Luna

Cryptocurrencies are selling out: In just eight days, most have lost up to half their value. The culprit is the collapse of a smaller digital currency, which is shaking confidence in the cryptocurrency world – with consequences for the stock markets as well.

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What happened?

Several cryptocurrencies have fallen sharply in value since the beginning of May and continue to fall every day. Bitcoin is 32 percent less valuable today than it was a week ago. The second largest cryptocurrency Ethereum fell 36 percent, others as large as Binance Coin (-41 percent) and XRP (-47 percent) lost even more markedly.

Why?

The development is due to a cryptocurrency called Luna, which had a market value of around 27 billion euros a week ago but is now almost worthless. Their demise has shaken confidence in the crypto markets, which is why investors are also selling many other digital coins.

Why did Luna crash like that?

Luna is a cryptocurrency linked to another currency called TerraUSD. Both were brought to market by American Do Kwon and his company Terraform Labs. TerraUSD is a so-called stablecoin whose value should hardly fluctuate. Kwon Promise: A unit of TerraUSD can be exchanged at any time for $ 1 worth of Luna coins. But in early May, TerraUSD lost its price stability for unknown reasons. Therefore, Luna also lost value. At the same time, the case damages confidence in stack coins in general.

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What are stack coins?

Stablecoins are cryptocurrencies whose value is predetermined. For example, there are stack coins where a coin is always worth a US dollar. To ensure this, the company issuing this stablecoin must have enough US dollars to be able to pay out all cryptocurrencies if necessary. Another way to ensure price stability on a stablecoin is through algorithms. Something that TerraUSD (UST) used. It works like this: A UST can be exchanged for a US dollar worth of Luna Coins at any time. So if UST slips below $ 1, investors have a buying opportunity. You can buy UST for less than a dollar, but get Luna Coins for a dollar – and get an instant profit.

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In theory, this mechanism should ensure that the value of a UST always fluctuates around one US dollar. Investors therefore like to use such stack coins to park money before investing them in other cryptocurrencies. However, the value of UST fell to $ 0.45 in early May. This suddenly made UST very attractive, but there were not enough Luna coins on the market to meet the demand. Therefore, Terraform Labs broke its promise to always exchange UST for Luna coins. With it, confidence in both currencies and the crypto market as a whole collapsed.

I’ve never heard of UST and Luna. Why is it so important that bitcoins go down as well?

As of October, all stack coins together had a market value of $ 130 billion. So they are hugely important to the crypto world. UST was the third largest of these stack coins, with a market value of about $ 14 billion, until it collapsed.

The collapse of TerraUSD also raises suspicions about other stack coins. The largest – Tether – has long been accused of not having sufficient security to ensure stability. However, since there is no regulatory authority in the crypto world, this is difficult to verify independently.

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What does the cryptocurrency crack mean for other investments like stocks?

Some companies that are traditionally listed also make their money on trading cryptocurrencies. First and foremost are trading platforms like Coinbase . Their share price was still already in free fall, but has now risen again. On the tech exchange Nasdaq, the price fell to a record low of $ 58. Since the onset of the crash, there has been a minus of 58 percent, which was also lifted by weak quarterly figures released during this period. However: The fewer cryptocurrencies traded, the less money trading platforms make.

MicroStrategy shares lost 54 percent . Last year, the software maker from the USA started building up reserves in Bitcoin and paying its board of directors in the cryptocurrency. Cryptocurrency-focused financial services firm Silvergate Capital and Galaxy Digital Holdings lost 45 percent and 47 percent of their stock value, respectively, while cryptocurrency group Marathon Digital Holdings fell 44 percent.

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