Cryptocurrency stocks are taking a fresh hit amid a resumption of broader risk flight on growing fears of an inflation-driven global recession.
A collapse in the value of one so-called stablecoin, TerraUSD, was widely blamed for stoking a crypto asset sell-off that saw Bitcoin hit a 20-month low in one stage on Thursday.
The largest cryptocurrency by market value hit a low just above $25,400 after TerraUSD broke its peg to the US dollar.
The stablecoin, so named because such digital tokens are pegged to the value of traditional regulated assets, plunged in value late on Wednesday, sending shock waves through other similar assets, including Tether, which also severed its peg to US currency.
TerraUSD is an algorithmic stablecoin, which means it has no reserves. Its value is supposed to be maintained by a complex mechanism involving exchanging TerraUSD coins with a free-floating cryptocurrency called Luna to control
However, investors in Luna have also run for the hills this week, raising fresh questions about the reserve assets held by major stablecoins in general to secure their exchange rates and potential liabilities when large numbers of holders drop out. the market.
According to CoinMarketCap, cryptocurrencies are down nearly two-thirds in record market capitalization.
Bitcoin, early Thursday, had a peak value of $69,000 last November.
Its demise has followed that of so-called growth stocks, mainly technology, on Wall Street.
While companies like Amazon, Meta (owner of Facebook), Alphabet (of Google fame) and Tesla led Wall Street’s rally from the pandemic lows in 2020, they have since borne the brunt of a sell-off this year to as their yields and valuations are discounted more deeply when interest rates rise.
The Federal Reserve signaled an aggressive path ahead for rate hikes, likely to mirror this month’s 0.5% increase at several meetings this year, in a bid to tackle rising inflation.
The prospect of such a tightening in the coming months has also pushed the dollar to 20-year highs, with the pound at a two-year low below $1.22, but has also raised fears that the US economy will suffer. as borrowing costs rise. .
Despite the warning from the Bank of England, there was a risk of recession ahead for the UK economy last week, it continued its attempt to rein in inflation expectations by raising the bank rate for the fourth consecutive time, to 1%.
COVID lockdowns in China have added to economic jitters as the disruption to the global supply chain also threatens to drive inflation further down the line.
It is already being driven by demand outstripping supply and the effects of Russia’s war in Ukraine, hurting risk appetite.
Among the latest confidence-damaging developments was a warning from Germany that Russia was now using energy as a “weapon”, as Moscow said it would stop gas flows to the country through its main gas pipeline through Poland. .
Asian markets set the tone for stocks on Thursday, with the FTSE 100, the DAX in Germany and the CAC in Paris all falling more than 2% in one leg. London’s main index ended the day down 1.6%.
The tech-heavy Nasdaq, which has lost more than 25% of its value this year, fell another 1% in a broad sell-off.
Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown, said of market crashes: “Fears over runaway inflation and the abrupt end of the era of cheap money have sent cryptocurrencies falling over the edge as investors shy away from risky assets.
“Cryptocurrency fans, lulled into a false sense of security amid steep price increases during the pandemic, are now facing a rude awakening with assets plummeting across the board with Ether down just under 20% since yesterday, despite registering a slight recovery in the last few hours.
“Bitcoin is back up from its low of $26,000 hit earlier today, and is currently trading above $28,000, but is down 20% in the last five days.”