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Stablecoins luna and terraUSD add fuel to cryptocurrency fire

Billions erased in cryptocurrency meltdown
Billions erased from cryptocurrency market this week 06:01

The bloodbath in cryptocurrencies continued Thursday when the price of two benchmark "stablecoins" sank below $1, adding fire to a rout that has seen the price of bitcoin fall to its lowest level in more than a year.  

Two of the most sturdy tokens in the cryptocurrency world fell below their benchmark this week and that fueled a digital currency selloff Thursday, leading to price drops in bitcoin, ether and solana. Bitcoin fell as low as $26,513 Thursday, down 8% from Wednesday. Ripple has fallen 19% to $0.38 and ether is down 14% to $1,981. Those declines began soon after the prices of terraUSD and luna dropped below $1.

TerraUSD and luna are known in crypto circles as stablecoins, which means their value is tied to a commodity or a currency. In this case, terra and luna have been pegged to the U.S. dollar, meaning every luna is supposed to be worth $1. Some investors have grown to depend on stablecoins like luna because it shields their money from the wild swings typical of many cryptocurrencies.

While there are many stablecoins, terra and luna are two of the biggest and most popular with investors, with market caps of $4.2 billion and $60 million, respectively. 

As more investors have exited risky crypto markets in recent weeks, luna and terraUSD fell to 99 cents on Monday and luna fell below a dollar Wednesday night. Both tokens continued to trade below $1 on Thursday. 

The selloffs Thursday have helped the crypto market lose almost $1 trillion in value over the past month, Forbes reported. It also means some investors who were once gung-ho on crypto have sold their holdings for a loss. 

"Confidence has been waning"

The retreat of luna and terraUSD signaled to investors that the broader crypto segment is at risk, said Edward Moya, senior market analyst at Oanda.

"Bitcoin has been a casualty of the broader market selloff of risky assets, but the latest crisis with stablecoins triggered the collapse of the $30,000 level, which was a key entry point for many institutional investors," Moya said in a research note to investors, adding that a stock market rebound could help cryptos. "Confidence has been waning in the cryptoverse, but it seems we are getting close to the end of the market sell-off." 

Can cryptocurrency go mainstream? 07:09

The crypto selloffs are impacting individual investors and crypto-focused companies alike. Coinbase lost half its value in the past week due, in part, to slumping crypto prices. The crypto exchange platform on Wednesday reported a $430 million net loss in the first quarter.

Luna and terra are just the latest reason why crypto prices have fallen sharply this month. Rising interest rates and volatile equity markets have also raised investor concerns about the broader U.S. economy, spurring some to dump their digital currencies

Many investors have ditched their crypto holdings because they realized the tokens are just as volatile as any other asset, said Moe Vela, co-founder of cryptocurrency Unicoin. The original lure of crypto being decentralized and free from government regulation has lost some its luster, while more recent investors are more likely to cut their losses when cryptos slump, he said. 

"The average investor around the world still seeks some semblance of security in their investments — some comfort, some predictability," Vela told CBS MoneyWatch. "I don't know how you can call yourself stable when you've dropped in value 50% over a year."

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