NEW YORK (AP) — It’s been a wild week in crypto, even by crypto standards.
Bitcoin collapsed, stablecoins were anything but stable and one of the most prominent companies in the crypto industry lost a third of its market value.
Here’s a look at some key developments in cryptocurrencies this week:
Bitcoin’s price fell to around $25,420 this week, its lowest level since December 2020, according to CoinDesk. It stabilized around $30,000 on Friday, but that’s still less than half the price bitcoin took up last November.
Some bitcoin proponents have said the digital currency can protect its holders from inflation and act as a hedge against a stock market decline. It hasn’t been done lately either. Consumer-level inflation rose 8.3% in April compared to a year ago, a level last seen in the early 1980s. With the Federal Reserve aggressively raising interest rates to curb inflation, investors are dumping risky assets, including stocks and cryptocurrencies. The S&P 500 is down more than 15% this year. Bitcoin is down about 37% so far.
Other cryptos have fared just as badly. Ethereum is down 44% and dogecoin, a cryptocurrency favored by Tesla CEO Elon Musk, is down 53%.
Stablecoins are seen by cryptocurrencies as a safe haven. That’s because the value of many stablecoins is pegged to a government-backed currency, such as the US dollar, or precious metals such as gold.
But this week, one of the more widely used stablecoins, Terra, experienced the cryptocurrency equivalent of a run in the bank.
Terra is a stablecoin in a cryptocurrency ecosystem known as Terra Luna. Terra is an algorithmic stable coin, meaning it has modified its offering through complicated buying and selling to keep its peg at $1. Terra was also fueled by an incentive program that gave holders high returns on their Terra. Luna was the coin meant to be used in the ecosystem to buy and sell assets, and at its peak was worth over $100.
Although Terra’s developers said their algorithms would stop the stablecoin, they decided to further stop it from owning bitcoin.
Terra’s troubles started with a combination of withdrawals of hundreds of millions, perhaps billions of dollars from Anchor, a platform that supported the stablecoin. Combined with the general concerns about cryptocurrencies and bitcoin’s price decline, Terra began to lose its peg to the dollar. The bitcoin that Terra owned was also worth less than they paid for it, and by selling that bitcoin in the market, bitcoin prices fell even further.
Attempts by Terra’s developers to maintain liquidity failed. By Friday, Terra had fallen to 14 cents and Luna was trading at a value of less than one ten-thousandth of a cent.
Coinbase lost about a third of its value this week, with the cryptocurrency trading platform reported that active monthly users fell 19% in the first quarter amid the decline in crypto values.
Investors were already racing for the exits even before Coinbase reported a quarterly loss of $430 million. Shares closed at $58.50 on Thursday. On the day of the first public offering, just 13 months ago, the shares hit $429 each.
In a letter to shareholders, Coinbase said it believes current market conditions are not permanent and it remained focused on the long term while prioritizing product development. While most Wall Street analysts expect Coinbase to weather the storm, they also warn that increased regulation of cryptocurrencies could hinder the company’s growth.
Much has been said about regulating cryptocurrencies, but little in the way of action.
Treasury Secretary Janet Yellen, who responded to crypto market volatility this week, said on Thursday that the US needs a regulatory framework to guard against the risks surrounding cryptocurrencies and stablecoins.
In March, Federal Reserve Chair Jerome Powell said new forms of digital money, such as cryptocurrencies and stablecoins, pose risks to the US financial system and new rules will be needed to protect consumers. This Monday, just before Terra’s implosion, the Fed said in its semi-annual financial stability report that stablecoins are vulnerable to “runs” that could harm owners of the coins.
Securities and Exchange Commission chairman Gary Gensler has said the crypto industry is “filled with fraud, scams and abuse” and that his agency needs more authority from Congress – and more funding – to regulate the market. .
Britain has unveiled plans to regulate stablecoins as part of a broader plan to become a global hub for digital payments. European Union lawmakers have agreed on draft rules for cryptoassets, but have yet to negotiate a final bill.
AP Economics writer Christopher Rugaber contributed.