On Wednesday, the implosion of the TerraUSD stablecoin sparked wide-spread panic in the crypto space. Thankfully 24 hours later, things have calmed down substantially.
Terraform Labs halted, restarted and then halted again following the collapse of TerraUSD and its sister-token Luna. Developers who work on the blockchain tweeted that the second halt was intended to enable them to “come up with a plan to reconstitute” the network. TerraUSD (UST) never regained its 1-1 peg to the US dollar, and the associated Luna token were trading near zero mark at the time of the second halt.
Elsewhere in crypto, sentiment had started to rebound. The largest stablecoin, Tether, used in cryptocurrency markets to facilitate trading, recovered from an earlier mini-crash, soothing concerns that its problems will spread into the broader market.
During the previous day’s trading, Bitcoin fell to about $25,000 before trading above $30,000 after.
It’s a welcome change from the chaos that engulfed crypto markets on Wednesday as UST entered a “death spiral”. Bitcoin had suffered a nearly 10% drop on that day.
“The fact that Tether is stabilizing means that the margin calls that took place are fading,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Whenever you get forced selling in anything, it overshoots. People are still nervous, but the selling has abated. Investors will be nervous for a few more days, but the supply-demand equation has stabilized again.”
Treasury Secretary Janet Yellen, said Terra’s tumble proved the dangers of tokens of being pegged to the US dollar, though she added that its sudden collase didn’t pose a threat to financial stability.
“Crypto has little economic significance. Not that many people own much of it,” said Brian Nick, chief investment strategist at Nuveen.
“What gets punished when financial conditions are tightening? Anything with a high valuation and an uncertain or non-existent revenue stream,” he said by phone. “And crypto has inarguably high valuations and no revenue stream. That’s very much of a piece with what we’re seeing in growth stocks, tech. It’s correlated but obviously it’s more volatile because the market is less liquid.”
However, cryptocurrencies are still mired in a deep downturn. “The question, as always, is: now what?,” wrote Michael Purves, chief executive and founder of Tallbacken Capital Advisors. He expects further plummet for Bitcoin and the coin may potentially hit $20,000 or $15,000.
“A move to 15K would be a move off the January levels which would be quite consistent with the last three long term momentum reversals we have seen,” he said in a note. “However, bears should be prepared for aggressive relief rallies along the way (just as they should with equities).”