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Why is crypto crashing now? Answering the biggest questions about the dramatic crypto sell-off

May 12, 2022, 11:30 PM UTC
Updated May 14, 2022, 2:06 PM UTC

Decimated. Ravaged. Wiped out. Whatever the adjective, one thing that’s abundantly clear by now is that the cryptocurrency markets are in turmoil—with no end in sight. Since the market hit an all-time high in November, crypto has been stumbling, but, in the last week, the decline has accelerated in shocking fashion, sparking questions about the stability of so-called stablecoins, whether another long-awaited crypto winter is here, and what investors can do about it.

How much have crypto markets dropped?

Since the total value of crypto markets globally hit an all-time high in November 2021, the market has crumbled 59%. But the last week has been particularly brutal, with crypto overall plummeting from $1.18 trillion to $1.2 trillion, as of Thursday afternoon at 3 p.m. ET, according to data from CoinMarketCap. That’s a decline of 33% in a single week. Of the sell-off, the damage has been widespread. Bitcoin is down by a third since May 4, now trading at around $28,000, while Ethereum’s ETH token, the second largest crypto out there today by market capitalization, has dropped 35%. Altcoins like Cardano’s ADA, Solana’s SOL, and Polkadot’s DOT are all down more than 45%. And the original meme token, Dogecoin, has plunged 40%.

How bad is this?

Investment gains and losses are all a matter of perspective, though. Zoom back far enough, and you’ll see that the total value of global crypto markets today is still up 789% from March 2020 when crypto began to its latest rip higher. By comparison, the global value of crypto markets in the now-infamous 2018 crypto winter dropped by about 70%.

Why is Bitcoin crashing?

There’s no one reason, per se, behind why the original crypto is now trading at its lowest level since December 2020, as Fortune‘s Marco Quiroz-Gutierrez recently reported.

Bitcoin, like other risk assets such as technology stocks, special purpose acquisition companies, and newly public stocks, have all struggled for months now in the face of soaring inflation in the U.S. that has caused the Federal Reserve to drop the idea that higher prices are “transitory” and start hiking interest rates. And while Bitcoin has long been touted by its supporters as the ideal inflation hedge, it’s far from one today, as myself, Fortune‘s Shawn Tully, Quiroz-Gutierrez, and others have all reported before. The latest to reach the conclusion was analysts at Bank of America, according to Fortune‘s Taylor Locke. So, when the Fed indicated May 4 that it would raise rates by half a percentage point, Bitcoin began to sink. “This week markets took a sudden U-turn following the Federal Reserve’s meeting,” Lucas Outumuro, head of research at IntoTheBlock, wrote in a newsletter last week, as Locke reported. “Stock market indices and crypto moved in sync, yet again.”

Perhaps exacerbating Bitcoin’s decline, though, was the collapse of a purported stablecoin known as TerraUSD, or UST for short.

What is UST crypto?

Created by the Do Kwon-led Terraform Labs, UST is a breed of crypto known as a stablecoin.

The idea, as the name implies, is to offer investors a safe haven in the wild, gyrating world of crypto with a digital asset that is typically pegged to some sort of benchmark, like, in the case of UST, $1. So, to do that, most stablecoins like the two largest, Tether and USDC, purport to be backed by an equal dollar amount of assets—typically cash, bonds, and some other mix. UST is what’s known as an algorithmic stablecoin, though, meaning there are no assets backing it. Just an algorithm that hinges on traders burning or creating tokens—whether it be in UST or its sister crypto, Luna—to keep the price of UST around $1, as Quiroz-Gutierrez reported in April.

So, what happened to UST?

On Saturday, UST first detached from $1. The not-so-stable stablecoin’s decline is believed to have begun as UST deposits dropped on Anchor, a Terra-based decentralized finance protocol that has long been a source of concern for UST skeptics, Fortune‘s Locke has reported. And since then, UST hasn’t been able to recover. On Monday, it dropped down to the 70-cents range. On Tuesday, the 60-cents range. And on Wednesday, UST fell below 30 cents. (It was trading around 40 cents, as of Thursday afternoon.)

And what happened to Luna crypto?

Luna, the sister crypto, has plunged to just 3 cents as a result. A week ago, Luna tokens were going for as much as $87 in the open market, making its 99.97% seven-day decline the worst of any crypto tracked by CoinMarketCap. Some 97% of that came on Thursday alone, when the Terra network that both Luna and UST exist on was halted for nearly two hours.

Why is Coinbase stock crashing?

The largest U.S. crypto exchange’s stock has been tumbling for months now, a decline that closely mirrors the crypto market’s. Like Bitcoin and Ether, Coinbase hit an all-time high in November. Since then, the company’s stock has been swept up in the risk-off trade, with investors moving money into steady cash earners and out of growth-oriented companies like Coinbase. But the sell-off accelerated to new speeds this week, when, on Tuesday, Coinbase reported first-quarter earnings. And as I wrote Thursday morning, the results weren’t great. The company posted a net loss of $430.7 million in the quarter, versus a profit of $771 a year ago. Monthly transacting users were down quarter over quarter. And trading volumes dropped as well. It may not get much better soon, either.

“In an environment where the market is focused on profitability, recession risk, and the fading of pandemic-driven exuberance in retail trading, we believe COIN’s stock will struggle to outperform in the near term,” Goldman Sachs analyst Will Nance wrote in a May 11 research report.

Should I sell crypto or will it go back up?

So, should you sell your crypto? Buy the dip? Close your Coinbase account and never look back?

To use a non-answer answer, it depends on, well, you. How much risk can you take on? Do you have enough in savings? Are you close to retiring or just starting your career? Have a mortgage? What’s your portfolio allocation?

Analysts and crypto experts including FTX CEO Sam Bankman-Fried are optimistic that the current downturn is just that rather than some sort of Black Swan event, and that, once stocks begin to recover, so too will crypto. “Crypto markets have mostly stabilized,” Bankman-Fried wrote in an email to my colleague Locke, who went on to explain that the executive was essentially explaining that crypto will correlate with traditional markets.

In the meantime, you can always heed the advice of Mark Cuban, who told Locke: “Don’t go overboard on crypto.”

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