Why are crypto markets crashing?

Disaster has struck crypto, and nobody has been left untouched.

A huge selloff in crypto markets has flushed away more than $200 billion in wealth in 24 hours, according to CoinMarketCap.

The previously high-flying sector has been hit hard along with other risk assets by rising inflation, the Federal Reserve hiking rates, and geopolitical instability caused by the Ukraine war, according to analysts.

But the most recent plunge may have been fueled by the collapse of a supposed “stablecoin” that lost its peg to the U.S. dollar and dropped to about 30 cents. Investors with money tied up in the algorithmic stablecoin TerraUSD, and its sister cryptocurrency Luna, have lost their shirts. As of Thursday morning, TerraUSD was trading down 8%, still 60 cents off its dollar peg; Luna was down 99%; and investors are venting on social media about losing thousands.

The general downturn has affected nearly every cryptocurrency, and even the largest have not escaped major losses.

Bitcoin

Bitcoin, which makes up roughly 40% of the crypto market, dropped to $28,700 Thursday, its lowest price since December 2020. Early last month, the crypto behemoth was priced at more than $40,000, but a slide that began on April 8 has shown no signs of letting up. On April 8, Bitcoin was priced at around $48,572; as of Thursday, it was down 40% from that price in just over a month.

The cryptocurrency is also down more than 58% from its highs of about $69,000 in November 2021.

Bitcoin, which has long been touted by supporters as an inflation hedge, is behaving much more like a risk asset, according to a Bank of America Global Research note from May 6. The bank wrote that Bitcoin has been trading as a risk asset since July 2021. The correlation between Bitcoin and the S&P 500 reached all-time highs on Jan. 31, Bank of America analysts wrote in the report, when the correlation between Bitcoin and the tech-heavy Nasdaq 100 also was near all-time highs.

Ether

The second-largest cryptocurrency by market capitalization, Ether, was also down double digits on Thursday. The cryptocurrency was trading at $1,954, down 17% over 24 hours. It had been trading at $2,846 just seven days ago on May 5 and has dropped 31% since then. The cryptocurrency is trading at its lowest levels since July 2021.

BNB

Meanwhile the cryptocurrency associated with the world’s largest crypto exchange, Binance, was also not spared.

The cryptocurrency, Binance Coin or BNB, was down about 9% over the past 24 hours as of Thursday morning, trading at $274, according to CoinMarketCap. The crypto was trading at more than double that price as recently as December 2021. As of Thursday the token was down 30% from its price of $392 just seven days ago. BNB was down 59% Thursday from its high of $669 last November when crypto prices were peaking.

TerraUSD (UST)

The worst example of the crypto tumble is TerraUSD (UST) and the cryptocurrency that is supposed to help it keep its peg to the U.S. dollar, Luna.

UST lost its peg last week and after a brief recovery dropped to as low as 30 cents on Wednesday. The supposed stablecoin was trading at 40 cents as of Thursday and had still not recovered its dollar peg, even as the company that created it, Terraform Labs, and its CEO South Korean crypto developer Do Kwon announced a plan to right the ship. The stablecoin’s instability has brought down its partner cryptocurrency substantially.

Luna

The Luna cryptocurrency experienced a major run-up since January 2021. The token traded for under $1 for all of 2020, according to CoinMarketCap. But starting in January last year the crypto went on a major tear as more people poured money into its sister cryptocurrency, the now collapsing UST stablecoin. By April, Luna was trading at more than $100, before slowly coming back to earth. Yet while the token was trading at about $80 just seven days ago, as of Thursday, it was basically worthless, down 99% over the past 24 hours, to about 1 cent per token, according to CoinMarketCap.

The precipitous drop in the cryptocurrency was fueled by the collapse of the stablecoin it was meant to help maintain a dollar peg, UST. Luna’s price is tied to the stablecoin, created by Terraform Labs, and as it collapsed to as low as 30 cents this week it brought Luna down from trading at $64 when UST first lost its peg last Saturday to being worth about a penny as of Thursday.