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Crypto is in meltdown mode this week.


The crypto world went into complete meltdown this week in a selloff that graphically illustrated the risks of experimental, unregulated digital currencies.

The moment of panic represented the worst cryptocurrency reset since Bitcoin fell 80% in 2018, David Yaffe-Bellany, Erin Griffith and Ephrat Livni report for The New York Times. But this time, the fall in prices has a wider impact as more people and institutions hold the currencies. Critics said the collapse was long overdue, while some traders compared alarm and fear to the onset of the 2008 financial crisis.

“It’s like the perfect storm,” said Dan Dolev, an analyst who covers crypto companies and fintech at Mizuho Group.

The fall in cryptocurrencies is part of a broader pullback in risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine. Those factors compounded a so-called pandemic hangover that began as life began to return to normal in the United States, hurting stock prices of companies like Zoom and Netflix that thrived during the shutdowns.

But the decline in crypto is more serious than the broader stock market plunge. While the S&P 500 is down 18% so far this year, the price of Bitcoin has fallen 40% over the same period. In the past five days alone, Bitcoin has fallen 20%, compared to a 5% drop in the S&P 500.

Cryptocurrency prices peaked late last year and have since slipped as fears about the economy grew. But the collapse accelerated this week when TerraUSD, a stablecoin, imploded. Stable coins, which are meant to be a more reliable medium of exchange, are usually pegged to a stable asset such as the US dollar and are intended not to fluctuate in value. Many traders use them to buy other cryptocurrencies.

TerraUSD had the backing of a credible venture capital firm. But TerraUSD was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that tied its value to a sister cryptocurrency called Luna.

This week, Luna has lost almost all of its value. This immediately had a ripple effect on TerraUSD, which fell to a low of 23 cents on Wednesday. As investors panicked, Tether, the most popular stablecoin and the kingpin of crypto trading, also dropped its own peg to $1. Tether fell as low as $0.95 before recovering.

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nytimes

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