On Friday, bitcoin rebounded above $30,000 despite continued woes in stablecoin TerraUSD which sent the crypto market into panic.
The world’s largest cryptocurrency bitcoin was trading at around $30,262.85 as of 4 a.m. ET on Friday, according to data from CoinGecko, up 8% in the past 24 hours after falling to all-time lows. since late 2020 earlier this week.
However, the digital currency is still down 16% in the last seven days.
The recent crypto crisis, which saw billions of dollars disappear from the market, was largely triggered by the crash of a controversial stablecoin known as TerraUSD or UST, which is supposed to be pegged one-to-one with the US dollar. .
The UST, however, lost its peg and was trading around 14 cents on Friday, according to data from CoinGecko.
Luna, a token closely associated with UST, is now worth $0.
UST and Luna are related. UST is dubbed an algorithmic stablecoin, which means that its $1 peg is supposed to be governed by an underlying code. This is fundamentally different from other stablecoins like Tether and USDC which are backed by real-world assets such as bonds. UST has no real reservations.
The UST algorithm works through a complex system of token minting and burning to maintain price stability. A UST token is created by destroying a portion of the associated cryptocurrency luna to maintain the peg to the dollar.
But the extreme market volatility tested the UST and it was unable to maintain the peg.
The fact that the Terra blockchain, which underpins UST and Luna, stopped processing transactions twice in less than 24 hours, adds further complications.
In addition to the UST saga, the crypto markets have been hit by a number of other headwinds including higher inflation and interest rate hikes which have prompted a sell-off in global equity markets which reverberated. Cryptocurrency price movements have been correlated with stock markets.
“The Luna/UST situation has hit market confidence pretty hard. Overall, most cryptocurrencies are down [more than] 50%. Combining this with global inflation and growth fears, does not bode well for crypto in general,” said Vijay Ayyar, vice president of business development and international at crypto exchange Luno.
Even bitcoin’s big bounce might not be sustainable.
“In such markets, it is normal to see bounces amounting to 10-30%. These are normally bear market bounces, testing previous support levels as resistance,” Ayyar said.