Bitcoin plunges as Terra’s meltdown drags cryptos lower


Bitcoin and other cryptocurrencies remained under pressure, with the focus on the meltdown of stablecoin TerraUSD, which is designed to be pegged to the US dollar.

The price of Bitcoin fell 2% over the past 24 hours to just above $31,000, having dropped below $29,800 in the trough of Tuesday trading before rallying. Bitcoin began a slide last Thursday that took it to $36,000 from $40,000. By Monday, it was notching new annual lows.

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“Bitcoin’s plunge below the $30,000 level did not last a long time, but the world’s largest crypto is still in danger,” said Edward Moya, an analyst at broker Oanda. “Too much institutional money will have a tight leash with their Bitcoin trades and they most likely won’t tolerate a move below the $30,000 level.”

Other cryptocurrencies were also falling. Ether, the second-largest digital asset, was down 1% to just above $2,350. The token underpinning the Ethereum blockchain network is at its lowest level since July 2021, and dropped as low as $2,230 in the depths of Tuesday trading.

Smaller cryptos, or “altcoins,” were even deeper into the red. Solana lost 8% and Cardano retreated 6%. “Memecoins”— called that because they were initially intended as internet jokes rather than significant blockchain projects—also lost ground, with Dogecoin down 8% and Shiba Inu 9% lower.

“Bitcoin faces short-term resistance at the $32,500 level, followed by the $35,000 region,” Moya said. “To the downside, Bitcoin will try to hold the $30,000 level, with $28,500 providing major support.”

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In the spotlight were stablecoins, a breed of cryptocurrency designed to maintain a peg to another asset — often the US dollar or another fiat currency. Stablecoins play an integral role in the digital asset ecosystem and are supposed to be a source of security in a world of volatility.

But TerraUSD, which was previously one of the 10 largest digital assets, lost its peg to the dollar on Saturday by a few cents and the situation has since deteriorated significantly amid heavy selling pressure. The coin was last traded below 50 cents on the dollar, having gone as low as 24 cents early Wednesday.

Terra is a so-called algorithmic stablecoin. While some stable tokens, like Tether and USD Coin, are meant to be backed by assets to maintain their peg, Terra relies on financial engineering.

The Terra protocol allows traders to take advantage of an arbitrage opportunity when TerraUSD weakens below the value of a dollar. They can “burn” one TerraUSD for $1 worth of Luna, making a profit and taking a TerraUSD out of circulation when the token’s price slips below the dollar, or do the reverse when the TerraUSD strengthens.

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But as billions of dollars of Terra was dumped on Saturday, it all came undone. Luna has crashed, moving 84% lower over the past hours to just $5, having ended last week above $80.

No amount of rescue, including the mobilization of tens of thousands of Bitcoin — billions of dollars worth of crypto — to try and restore the peg and add liquidity, has worked so far. And it’s weighing on the crypto space at large, including on Bitcoin and Ether, which have been sold down amid the turmoil in the Terra ecosystem.

“The ongoing situation with [TerraUSD] has caused widespread anxiety in the crypto space,” said Stephane Ouellette, the CEO of crypto derivatives firm FRNT Financial (ticker: FRNT.Canada), in a note.

“Ether and Bitcoin are performing relatively in line with recent selloffs,” Ouellette said. “However, it remains unclear if the coins can maintain current levels considering the evolving [TerraUSD] situation which lacks a clear avenue towards resolution.”

Write to Jack Denton at jack.denton@dowjones.com

This article was first published by Barron’s.

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