So far this year, cryptocurrencies are down 40 percent. Although we are used to the volatility in the financial markets, this is an unusually large drop. In fact, we have to go back to 1931 to find an equally large annual decline in the US S&P 500 stock index.
There are probably more than 400,000 Norwegians who have invested in cryptocurrency, meaning that up to one in four adult Norwegians have lost significant amounts this year.
Cryptocurrency markets are seen by many as a solution for the world’s wealthy, who do not have their own bank accounts. This is hardly a good solution.
In the recommendation of the Storting Finance Committee on cryptocurrency mining in Norway, the majority emphasized that cryptocurrencies can provide safer transactions in a society with a poorly developed monetary system. Those who invested NOK 180 billion in the self-regulating crypto bank Terra UST probably disagree.
He lost most of his deposits within a few days.
Tera Cryptocurrency (index: UST) is part of the so-called stablecoin. This is a digital currency that should always be worth one dollar. Those who buy this do not expect any increase in value or loss, but it should always be equal to one dollar. It should be the same as a bank deposit.
This is the fastest growing part of coding. In the past year alone, hundreds of billions of kroner have appeared in the form of stacked coins.
Some people use Stack Coins as a bank account to handle the buying and selling of other riskier cryptocurrencies. It is faster and cheaper to convert bitcoin into cryptocurrency compared to traditional currency.
Others use stack coins as pure savings and to get a high interest rate. While ordinary depositors struggle to get any interest at all, they often get up to 20 percent annual interest in the coins stacked.
Until May 9, the market had confidence in the third largest stack coin, the tera. The company behind Terra does not have security in the form of cash, but does have a cryptocurrency called Luna. It is the number of luna in circulation that ensures that the land will always be worth one dollar.
The vast majority of depositors who put a total of 185 billion crowns into the ground last year did so because of a deposit rate of less than 20 per cent. The high deposit rate came from two components. The first half was a payment to provide their coin as collateral to verify Luna’s transaction, while the other half came from players who wanted to lend money for purchases in the cryptocurrency market.
Until the turn of the year, there was a fair balance between deposits and loans. But after deposits doubled through April, there were suddenly four times as many deposits as loans. Then it becomes difficult to give all depositors a high rate of interest.
The numbers are open online, and more and more critics have pointed out that there is a danger that the earth will collapse.
Instead of lowering interest rates and accepting lower deposits, the company behind Terra and Luna chose to keep interest rates high, and then spend tens of billions of kroner on buying bitcoin.
The idea was that bitcoin should act as a security. At first, it worked well, and there were more and more deposits. But at the same time, the imbalance has increased, the vast majority of this money has not been lent, and it has become difficult to understand how they can continue at high interest rates.
When the price of bitcoin fell by 30 percent from April to May 10, this meant that the fragile system became even more fragile, and then suddenly there was a withdrawal from Terra worth 40 billion kroner. It is believed that this withdrawal came as a coordinated move by a large hedge fund, as in the “Soros attack”, but it may also be that several of the big players were worried at the same time.
In any case, this meant that the terra system had to sell large amounts of bitcoin in a short time at low prices. It almost worked, and on May 10, they managed to bring the price back to $0.9. But for a coin that should always have a value of 1.0, 0.9 is not good enough. You’ve created cascading effects, and you’ve got a “run” bank.
Two days later, the currency collapsed, and depositors lost most of their assets.
To support Terra, billions of new Luna devices were released, and the Luna exchange rate was lowered, so that it also collapsed. Values of about NOK 400 billion have been lost here.
Thus, the sixth largest cryptocurrency in the world collapsed in just a few days.
The big money is still invested in the Stack Coins. The largest is Rope, and last week it had just over NOK 800 billion in deposits. Tether will have security in the form of financial investments, but Tether is not open about its portfolio.
After a few months of higher interest rates and higher credit spreads, they will likely have lost money this year, so it is uncertain whether the rope has good enough coverage. This contributed to depositors withdrawing NOK 90 billion in the past week.
Those who leave the rope receive a full settlement, meaning those who remain are left with increasingly poorer security deposits. This means that the risk of also getting savings in the world’s largest stack currency, the tether, is now very high. There are a number of other algorithm-based stack coins like terra, and for those who have their money there, the decision to sell should be simple.
Perhaps the decline in value we saw in Luna and Terra could have been avoided if we had put in place a regulation of the coins in the stack.
The developments in May showed that decentralized banks are fragile. Terra wasn’t the first stack coin to collapse, and more are likely to follow. Professional investors are most likely to see the signs of danger first, so it is the small clients who will suffer the biggest losses.
Therefore, priority should be given to developing a regulation that can protect small savers.
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