What is the most appropriate title for the crisis in the cryptocurrency market, which has caused huge losses to millions of cryptocurrency traders around the world. In the second week of last May, there was a massacre in the cryptocurrency market that caused traders to lose more than 200 billion dollars of their wealth.
As some currencies lost their price from $100 to $0, That is for the reason of the accelerated events that are taking place in the cryptocurrency market in recent weeks, An example of this is the Luna and I almost lost its value in a few days.
What is happening in the cryptocurrency market? And this question, by the way, is also asked by cryptocurrency traders themselves, many of whom do not yet understand what is happening and do not know how to act, especially when we talk about today's most popular currency (the color) which has lost almost all its value within days and its sister It is the unstable stablecoin, as well as TerraUSD and as usual in such shocks.....
How often it has become that there are some people who are upset and drown in their grief over their losses, and others see the collapse, but some of us see that this is a strong opportunity to enter the digital currency market, for example, there are many people who believe that they buy the stricken currency called Luna, which is Literally speaking, I am sure that 99% of those who want to buy this coin, have no idea why it collapsed in the first place. So we can ask.....
What is happening in the cryptocurrency market?
In the past two years, and specifically starting in the second half of 2020, many people started putting their money into the cryptocurrency market as a way to grow their capital in light of the economic downturn. In general, during this period, many conditions and factors have advanced, and people are still shopping in this direction, which means inflation in terms of increase, decrease in the value of money, decrease in normal economic activity, and traditional investment tools performance decreases.
All these factors affected the thinking of many boring people, pushing them to try their fortunes in the digital currencies that they hear from the media and social media. We hope that they will achieve wealth through it.
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The common thing between these people as shown in the picture, is their strong desire to make a profit through digital currencies, and this goal has people who actually succeed in achieving it, and there are more people who fail and lose everything behind it and those in front of it, including its health, Here is a very important question that we must ask.
How do I make money through the cryptocurrency market?
If you ask this question to any of the groups that have achieved good results in digital currencies, they can tell you that they made a good choice in the cryptocurrency market, and choose currencies that have a project and a future and such talk, while one of them lost because I chose failed or weak currencies. This talk at first glance makes sense, but in fact it remains empty, when you try to compare it to what is happening on the ground in the cryptocurrency market.
And the evidence is that if two people created a financial base in one aunt of the same cryptocurrency, they put their money, for example, Bitcoin, you will find that one of them lost and the other gained.... Below is the question: How did this happen?
In a nutshell, profit and loss in the cryptocurrency market largely depends on timing; Meaning the time of entry and exit.
Let me give you an example; Suppose I buy one this bitcoin for 30 thousand dollars, and after one day I woke up the next morning when I found one bitcoin for 40 thousand dollars, so I decided to go out, I sold it at that price and won another price. Someone bought it at the same moment for 40 thousand dollars, expecting its price to rise in the coming days, but this did not happen, and its price took a second plunge, and the bitcoin was worth 25 thousand dollars at this moment, and this person was afraid that its price would drop even more. He sold it at a loss here.
This market is very speculative. There are no real fundamentals that we can analyze and predict the future from, like the stock market, for example. This is the secret of the extreme fluctuations that characterize the price movement in the market.
The nature of the cryptocurrency market
On May 1, the bitcoin was equivalent to $38,471, and its price in half the month, specifically on May 15, was equivalent to $29,980, which means that it lost nearly 22% of its value in just two weeks; But there are people who believe that this is the end of Bitcoin, and others believe that this is just an opportunity and that its price will rise again.
As no one can be sure of any possibility of the two, the bitcoin price is expected to cross $50,000 within an hour from now, and it is expected to drop to $20,000 from now on. This is the nature of the digital currency market.
Stable coins in the market
These fluctuations in the digital currency market have become easier than drinking a hundred. These extreme price fluctuations throughout their lives have been a barrier standing in the way of the expansion of the cryptocurrency market and its spread among a larger number of people; Hence, a medium of exchange called Stablecoins or stablecoins appeared in the market, in short, cryptocurrencies that have a fixed value and are tied to a reserve asset that supports their value such as the US dollar.
These coins can be considered as a bridge between regular cryptocurrencies such as Bitcoin and traditional currencies such as the dollar. The stability of the value of this currency, which is often one US dollar, makes it a means of buying and selling in the cryptocurrency market, for example I own about $ 10,000, I put it in Dogecoin, and I fear its value if the price drops at any moment, below I will sell it to any of the currencies The stablecoins are in the market, and this is how I guarantee that the $10,000 will not be conscious because this coin is stable at $1, at the same time, I kept my money inside the cryptocurrency system without having to deal with traditional banks and stablecoins.
Types of stablecoins:
Collateralized Stablecoins
The first is the secured stablecoins which are currencies that are secured with assets and reserves equal to or greater than their value, such as Tether which is equivalent to one dollar and is backed by US dollar reserves, that is, if we assume that there are 80 billion copies of Tether, circulating in the cryptocurrency market today, then it should There will be reserves of USD 80 billion in the hands of the issuing company. So you can keep the price of 1 Tether stable at $1.
Stability comes from the fact that the currency is covered by reserves of real assets equivalent to its value, whether in the form of deposits in bank accounts, treasury bonds, or others.
The same idea of linking the dollar to gold at the time; As for the second type of digital currency, it is not covered or guaranteed, and this type is called (Algorithmic Stablecoins) .
Algorithmic stablecoins, or arithmetic stablecoins
Algorithmic stablecoins, or arithmetic stablecoins, are coins that are operated by an algorithm or a computational mechanism. According to the developers, that algorithm or arithmetic mechanism is supposed to work to ensure that its price is preferably fixed at one dollar without any guarantees.
How does this happen? In Dahlka, yes, in Dahlka, I prepare 3 papers. There is no economic logic at all and I have shown you how. Let me give you an example of the most famous currency of this type, which is TerraUSD, which is one of the main reasons for the collapse of the cryptocurrency market today, she and her sister Luna, The story began in September 2020, when a South Korean programmer named Do Kwon created through his company Terraform Labs a stablecoin called TerraUSD, more than a year and a half after launching a regular cryptocurrency called Luna in February 2019. TerraUSD is supposed to be a stablecoin with a fixed price of about $1. US, Luna is a regular digital currency, the price of which rises and falls according to supply and demand, like any digital currency in the market, whether it is Bitcoin, Dogecoin or others.
Now the question for Do Kwon programmer: How will you guarantee a fixed price of TerraUSD at $1 without any assets embedding it or supporting its value?
The question now for Do Kwon programmer: How are you going to guarantee the price of TerraUSD constant at $1 without any assets embedding it or supporting its value?
If I suppose that some people wake up early from their sleep, you decide to sell the bird, from where will you collect their money? Actually Kwon had a genius answer, I tell you that we will ensure the stability of TerraUSD through an algorithm based on the idea of Arbitrage, where we will connect Terra with her sister Luna, and focus with us on how many feet, in order to understand how the idea of this algorithm works; Because this idea will answer many of the mysteries that occur in the market today.
The idea of this algorithm is simply based on the infinite convertibility between terra USD, whose price is equivalent to one dollar, and the color whose price changes according to supply and demand. I mean, assuming that the price of the Luna coin is 20 cents per day, you, as the holder of it, can sell 5 of them for 1 TerraUSD and vice versa. If you have 1 TB, you can buy 5 colors. vice versa.
This depends on the stability of the price of Terra at $1. So if a tera is under $1 and is at 95 cents, for example, how do you get back to its value that is supposed to be constant at $1? And this is what we will answer them in the old question...
How constant is the price of TerraUSD
Here comes the idea of arbitrage. As a trader, the first thing I notice is that TerraUSD is trading at a lower price than the dollar, in the sense of buying it at that low and taking it to buy a certain color in it; Why would I buy a color in particular? Because for terra luna it is equivalent to 1 USD even if the actual price of Terra is 10 cents, so if I have a thousand TerraUSD and the price of Luna in the market is 2 USD, I can buy with a thousand terra 500 colors, this way I made an instant profit because the thousand The tera I bought each have 95 for example, I paid $950 for them, and I bought 500 colors with them, worth $1000; There is a profit of 50 dollars.
Someone will tell me what this has to do with the stability of the Terra? I mean, how does this movement guarantee the return of the price of Terra back to one dollar again?
In short the 1000 TerraUSD that I went to buy with Luna, it will be burned once the purchase is completed, I mean they do not exist, they are out of circulation; It has a new color appearing in the market and old Terra disappearing, which means that the number of Terra available in the market is decreasing as this movement continues.
Death Spiral
You and me and he and she are working more which means that the number of terra is less, and therefore its price goes up until it comes back to one US dollar again, but at the same time the number of people circulating in the luna increases and therefore its price decreases, people who hold TerraUSD are worried, because terra Guaranteed as we said in the Luna, so what's with it will take out the Terra and go to buy a new color, which will be built for the first time.
This process repeats or a spiral they call the death spiral, and this is exactly what happened with Luna and Terra before the middle of last fifth month, it will be clear through the context as the company that developed the currency created a decentralized lending platform called the Anchor Protocol to supply the demand for TerraUSD.
The idea of the platform is that it offers interest rates of up to 19.5% to investors who buy and hold TerraUSD there on May 6, which passed the Anchor Protocol on Terra, which had deposits equivalent to $14 billion. Just 3 days ago, by May 9, the volume of deposits in the Anchor Protocol had fallen by more than 5 billion dollars and reached 8.7 billion dollars.
But this decline caused a shock in the market, and a large wave of withdrawal began from the Terra area, and more pressure was put on the available colors, which increased dramatically in the market, which led to the collapse of its prices, so that the link between the two currencies practically collapsed, and for the link between the two currencies to collapse. In practice, the price of TerraUSD has fallen from $1 at the beginning of the month to about 17 cents.
And the debt was investing their money in TerraUSD on the basis that it is a stable currency with a fixed value of 1 dollar, it took a big loss. The Luna on the other hand, due to the large exits of TerraUSD, the number of them available in the circulation has increased a lot, reaching nearly 7 trillion copies.
After its price last April exceeded 116 dollars, its value became equivalent to 0.0002 dollars, in other words zero.
All this happened because of the two currencies, be it TerraUSD or Luna, there are no real assets to support them, both come out of thin air. Theoretically, in order to get its TerraUED value back, you must ascend as far as arousing Luna...
From that group that consults their minds to invest their money in Luna because of the collapse in its price, I tell them to think 6 times before you put your money in it. The most important thing is the sharp descent of Altera and Luna, which shook the market rigid and put pressure on other stable currencies:
- Tether that fell to 95 cents before rebounding to $1...
- Bitcoin also was one of the victims of this crisis in the last month, Bitcoin lost almost 26% of its value and reached nearly $ 30 thousand...
But the Terra and Luna crisis are not the only reason for the decline in the price of Bitcoin, there are other reasons related to the conditions of the American economy...........