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What is causing Bitcoin and other cryptocurrencies to crash?

Since its high in November 2021, Bitcoin and other cryptocurrencies have taken a major hit with the one of the 10 largest coins in the world collapsing.

Update:
Representations of virtual cryptocurrencies are placed on dollar banknotes.
DADO RUVICREUTERS

Bitcoin, the biggest cryptocurrency in the world, has had a difficult ride since it reached its peak value at the back end of last year. From a high of $1 trillion then, the currency now has a value of $562 billion. In just the last week, Bitcoin has lost 20 percent of its value. And it isn’t the only cryptocurrency in trouble.

The most recent selloff has been influenced by the fall of various stablecoins. These are cryptocurrencies that support their crypto assets by controlling the equivalent in real world assets, meaning they should never really trade for under $1. However, tether, the largest of these coins, began trading on Thursday at $0.98, meaning it was at risk of not having the capital to pay investors.

Tethers are important as cryptocurrencies are supported by the holding of reserves by said tethers to pay out investors. A collapse of the tethers would leave investors unable to be paid for selling their tokens. As sales increase, the risk of the tethers running out of capital becomes more real.

By far the biggest losers are those who had their money invested in Terra Luna, a cryptocurrency that has been totally wiped out. Another stablecoin, the Terra decoupled from the dollar and lost all of its value, scaring investors.

What happened to Terra Luna?

Before May 10, Terra Luna was in the top 10 most valuable cryptocurrencies with an estimated market value of more than $40 billion. However, a huge market crash sent the value tumbling (understatement) to $500 million, a drop of nearly 99 percent.

The r/TerraLuna subreddit was awash with stories of investors who had lost everything, prompting a pinned post with links to suicide prevention hotlines.

“I lost over $450,000, I cannot pay the bank,” one user member of the forum wrote. “I will lose my home soon. I’ll become homeless.”

Rapper and YouTuber KSI also lost millions of dollars by investing in Terra Luna. On May 11 he said ”I have bought about 100,000 Luna. Sticking it in a wallet and gonna see what happens in a few years. Could be the best/worst trade of my life. I saw an opportunity and I had to take it.” This cost him around $2.8 million.

Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said: “The terra incident is causing an industry-based panic, as terra is the world’s third biggest stablecoin.”

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