Cardano, Solana, Dogecoin and Polkadot saw losses between 12% and 14%, while tokens such as Monero and Zcash saw losses as high as 16%.

Why the crisis broke out

According to the latest data released by Coinglass, as of 8:00 on June 19, a total of 150,000 people in the encrypted digital asset field have experienced liquidation in the past 24 hours, with the amount of liquidation reaching as high as 567 million US dollars.

It is worth noting that Bitcoin once fell below US$20,000, which means that in the past seven months, the price of Bitcoin has plummeted by about 70% from the historical high of US$69,000 set in November 2021.

altcoins have also borne the brunt of the deterioration in the general market, with every token of the cryptocurrency trading in the red recently. Cardano, Solana, Dogecoin and Polkadot saw losses between 12% and 14%, while tokens such as Monero and Zcash saw losses as high as 16%.

The collapse of the Luna currency, which was used to support the value of Terra’s UST stablecoin at the time, wiped out $60 billion in market capitalization and triggered an unprecedented de-leverage shock wave in the crypto DeFi space, with accelerating sell-offs.

Therefore, the "Lehman-style" thunderstorms of cryptocurrency, the Federal Reserve's interest rate hikes, balance sheet reduction, are not the main reasons for the continued plummeting, but the death spiral caused by the stablecoin thunderstorms. Specifically, the encrypted digital asset industry has been experiencing a series of bad luck since May. The tens of billions of encrypted digital asset lending platform Celsius suddenly suspended withdrawals, transactions and transfers; recently the cryptocurrency hedge fund Three Arrows Capital ) sought a rescue package due to its inability to pay trading margins; cryptocurrency lender PayPal Finance suddenly froze all account withdrawals.

So what caused cryptocurrencies to “fail”? To answer this question we first need to understand what a stablecoin is.

Whether it is Bitcoin or other tokens, they often face violent fluctuations, so some people began to wonder, can there be a digital currency that can easily convert transactions in the digital world while avoiding fluctuations?

And so the idea of ​​stablecoins was born. In 2014, Tether, a subsidiary of the digital currency exchange Bifinex, issued the world's first stable currency USDT ( Tether ), which was pegged to the U.S. dollar at a ratio of 1:1. This means that for every USDT you issue, you must deposit one US dollar in your bank. In addition to USDT, the stable currency USDC issued by Coinbase and Circle in 2018 also exists in this way.

But this approach of one stable coin corresponding to one dollar is basically still a traditional financial method. This kind of operation is very different from Web3, and still relies on real currency collateral. So someone came up with another way to use algorithms to create stable coins. They changed the collateral assets from US dollars to mainstream cryptocurrencies such as Bitcoin and Ethereum. Since these cryptocurrencies are much riskier than the US dollar, they set up more collateral as a guarantee. Another more advanced way to play is to simply use no collateral assets and rely entirely on algorithms to adjust the supply and demand relationship to create and maintain currency value.

Simply put, it is the "mutual insurance" of cryptocurrency to jointly support the price. After such a set of operations, there is basically no need for any actual asset support. Previously, the largest and most mainstream algorithmic stablecoin system on the market was Terra, where Luna is located.

Imagination is beautiful but reality is cruel. Terra has designed several rules: 1. One UST = Luna worth 1 US dollar. UST is a decentralized US dollar stablecoin based on algorithms, which is different from USDT and USDC. This means that if the Luna price is 1 USD, you can exchange it for one UST. If the Luna price rises to 100 USD, you can exchange it for 100 USTs. 2. UST and Luna have a "two-way destruction and casting" relationship. This means that when you exchange Luna for UST, there is one dollar less Luna and one more UST on the market. When you exchange UST for Luna, there is one less UST on the market.

But what you need to understand is that neither Bitcoin nor other tokens have the status of legal tender. They are essentially assets rather than currencies. Since it is an asset, companies need to operate from the market supply and demand side.

So in order to promote its own stable currency, Terra established a project called Anchor. You can think of it as a bank that provides UST deposit and loan services. This kind of bank-like thing is actually available on other chains. The only difference is that Anchor provides an annualized rate of return on fixed deposits of up to 20%. This 20% rate of return has been exaggerated under the market conditions in recent years. What if the 20% interest rate cannot be achieved as promised? Just use the reserve in the foundation to make up for it. From last year to this year, Terra has carried out multiple reserve fund replenishments. In February this year, founder Do Kwon once again initiated a vote to inject US$300 million in reserve funds.

But even so, Anchor's reserves are expected to be exhausted in June, and Anchor's income from investing in Ethereum has also been affected by the general environment and has been bleak. , so there is bound to be a run. In addition, about 70% of USTs were holding Anchor interest and did not participate in circulation. Now when a dangerous situation occurs, users will rush to exchange UST into Luna and then into US dollars. A large number of people crazily squeezed Luna and UST into a death spiral.

Luna’s story is not uncommon in cryptocurrencies, but some are “Ponzi schemes” with high interest rates and high returns, and some are “insider trading.” It is not surprising that Luna has reached this day. First, she overestimated her earning power, and secondly, she did not have financial prudent thinking when it comes to operating tokens. On May 8, Terra withdrew 150 million UST from the capital pool due to a new plan. As a result, the liquidity of UST decreased temporarily, and the total size of UST was only 1 billion. At this time, large institutions chose to launch a large-scale UST sell-off plan.

It is not difficult to understand why the "mutual protection" cryptocurrency has generally plummeted in this round of plummeting.

A national-level implementation experiment of Bitcoin

Bitcoin once had a tendency to become a "global currency". Even though Bitcoin has plummeted so far, it is still the cornerstone of global cryptocurrency value belief. Bitcoin, the king of cryptocurrency, not only made Wall Street excited, but also made some politicians take action. El Salvador became the first country in the world to circulate Bitcoin as a legal currency.

will launch the official digital wallet Chivo in September 2021. As long as ordinary people download and register, they can immediately receive US$30, and new benefits are also prepared. Correspondingly, El Salvador will deploy more than 200 ATM machines across the country that can trade Bitcoin.

But the good idea of ​​the country’s President Nayib backfired. First of all, the rise and fall of Bitcoin was too drastic. Many Salvadoran vendors were surprised to find that they were only one minute late in transactions with customers, and then inexplicably lost money. A lot of dozens of cents.

Secondly, the infrastructure supporting Bitcoin is too stretched. Transfers from electronic wallet Chivo always take at least a day to be successful.

Moreover, the money we save in this wallet is often lost due to hacker attacks. In 2021, only 2% of the funds remitted from overseas to El Salvador chose the Bitcoin channel. This is a far cry from the president's original vision.

At present, Nayib has lost more than half of his Bitcoin investment, and more than 50 million US dollars have evaporated under the president's actions. (The government of El Salvador holds a total of 2,301 Bitcoins, with a cumulative purchase cost of more than 101 million US dollars)

So it is not difficult to see that the high volatility of Bitcoin is not suitable for use as a currency . An unstable currency will also lead to high social prices. growth, which is a very negative factor for investment and infrastructure. Johns Hopkins University economist emeritus Steve Hanke believes that Bitcoin will cause big problems for El Salvador. Its extreme volatility, corruption potential and uncertainty are just the beginning of a long list of problems.

Will Bitcoin be at risk of returning to zero?

Will Bitcoin be at risk of zeroing out? This is a matter of concern to both people in the currency circle and the melon-eating public.There are indeed many unfavorable factors for Bitcoin at the moment, such as the Federal Reserve raising interest rates and shrinking its balance sheet, the economic recession, and the sharp decline of Bitcoin, which has made mining a money-losing business. These factors will have a great negative impact on the future of Bitcoin.

But experts also said that the digital asset ecosystem is an emerging high-growth speculative asset class, and its tokens face similar risks to technology stocks . Some technology stocks have fallen by almost 80% in the past year. Take this The downside space is not appropriate to illustrate the Bitcoin pill.

So what may cause the risk of Bitcoin returning to zero? I am afraid it will only be regulatory policies. Judging from the current situation, encrypted assets do not involve all aspects of the economy like traditional institutions; central banks of various countries have always hated digital currencies, and prefer legal currency or "digital legal currency".

So will central banks around the world step up their efforts to directly restrict and ban the use of Bitcoin? It seems unlikely at present. For example, U.S. Treasury Secretary Janet Yellen said after the Luna incident that the collapse of Terra once again reflected the risks of stablecoins, and expressed the need to further strengthen the supervision of stablecoins and legislate regulations as soon as possible; Klaas Knot, chairman of the U.S. Financial Stability Board, proposed the future of the cryptocurrency industry Concerns that could harm currency networks; The European Commission is considering strict restrictions on the widespread use of stablecoins, requiring that the issuance of stablecoins stop when daily transaction volume exceeds 1 million, among other things.

Therefore, supervision is not to kill cryptocurrency with a stick, but to promote regulatory compliance operations. Some people may ask whether such a huge risk in the currency circle will trigger a financial crisis?

Economists and banking industry figures told the US media that they are not worried about the ripple effects of the virtual currency on the broader US economy. There is one reason for this, virtual currency has nothing to do with debt.

University of Toronto (University of Toronto) economist Joshua Gans said: "People are not really using virtual currency as collateral for real-world debt. There is no collateral relationship, and the virtual currency collapse is just a large paper loss. So this Ranking low on the list of economic problems.”

According to a May report from Goldman Sachs, virtual currency assets accounted for only 0.3% of U.S. household assets, while stocks accounted for 33%. The bank expects the drag on total spending from recent price declines to be "very small." Therefore, even in the United States, where cryptocurrency is the most active, there has not been large-scale use of real debt collateral, and there may be even less in other places. The possibility of chain financial reactions is extremely slim.

Will Bitcoin rebound? Of course it is possible, but ordinary investors should be cautious. Nowadays, stablecoin problems occur frequently, and the phenomenon of cutting leeks is not uncommon. has the potential for high growth, but it is also a high-risk asset, which must be kept in mind.

Reference:
How miserable would the “Lehman Crisis” be without central bank bailout? Source: Wall Street News
Who made Bitcoin "step down from the altar"? Source: 21st Century Business Herald
2008 The nightmare reappears, a billion-dollar institution collapses, and the "Lehman-style" collapse of the currency circle is taking place. Source: Silicon Star
The president personally speculates in Bitcoin, ruining a country. Source: Dr. X
Currency Circle US$2 trillion has been wiped out of market value. Why hasn’t it hurt the economy? Source: Wind information