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What Are Stablecoins?Stablecoins are a separate class of digital assets that came along with a clearly defined purpose to soften the volatility in the crypto trading arena. Similar to Bitcoin and other cryptocurrencies, stablecoins reside on the blockchain, but their supply isn’t controlled by any consensus mechanism. Instead, stablecoins work with a centralized company in the back, which doesn’t limit their supply but must sustain the production of each newly-minted coin by adding another asset to a specific fund reserve. The backup asset is usually a fiat currency, such as USD, but it can also be a commodity like gold or even another cryptocurrency For that reason, we say that stablecoins are pegged to a single unit of another asset in a 1:1 ratio. So, the stablecoins’ price can’t explode and plummet as a result of the public mood. If they’re tethered to USD, their market value is 1 USD sharp or an amount around 1 USD. Being a border case between fiat and crypto, stablecoins are raising governments' scrutiny since the company running the stablecoin doesn’t usually let the backup fund rest in a bank account but invests it in other dynamic businesses for profit. Technically, this isn’t illegal, but it means that the company doesn’t maintain the necessary liquidity at all times, and hence, stablecoins have no value at all. However, they have turned out to be the moving force in the crypto trading industry. Stablecoins have made the crypto scene a more flexible ecosystem, which wasn’t possible with fiat currencies because of the slow and expensive crypto-to-fiat transfers. For example, the most popular stablecoin, Tether (USDT), is the third crypto by market cap and, believe it or not, the first in trading volume according to CoinMarketCap. However, remember that stablecoins aren’t a suitable investment material for HODLers and crypto-saving accounts since price booms aren’t on their agenda. Now let’s find out how Luna and UST made a plot twist in this stablecoin story.
The Collapse of Terra (Luna) and TerraUSD (UST)The volatility of crypto-assets hasn’t been uncommon in the short but eventful crypto history. However, much of 2022 had been oddly quiet for the cryptocurrency market, and it stayed like that until one of the best-ranked stablecoins lost its stability. Out of the 100 circulating stablecoins, very few use algorithms as a backup instead of a tangible asset. Run by Terraform Labs company, UST is one of these algorithmic stablecoins that utilizes complex code combinations and LUNA to maintain continuous stability. More precisely, every time a UST token is generated, LUNA tokens of the amount of $1 are burnt and vice versa. This allowed UST holders to sell their coins in exchange for $1 of Luna, with a slight profit every time there was a threat for UST deppeging — going below the $1 standard. Since its launch in 2019, Luna has been a well-performing token with a steady rise and high rank on all relevant crypto charts. However, once the bearish climate started discouraging investors on a global scale, they started massively selling out their UST coins, which caused lethal inflation and devaluation of Luna. For illustration, at the beginning of 2022, there were 345 million units of existing LUNA tokens, and this number drastically jumped to 3.47 billion on May 12, only to hit an unbelievable 6.5 trillion units of Luna the very next day. Ironically, LFG (Luna Foundation Guard), the company responsible for adding collateral supply to maintain the UST peg, presented a recovery package whereby the foundation purchased a huge amount of bitcoins to be added to the treasury reserve, thus keeping UST alive. However, this was only a short-term plan executed at the wrong time — in May 2022, BTC wasn’t doing well on global markets, which led to additional negative outcomes for LFG. Eventually, major cryptocurrencies like Bitcoin and Ethereum are bouncing back, leaving Luna as collateral damage in this market mess. Three days after the black May 12 (1 BTC = 28,000 USD), Bitcoin’s price rose by nearly 10%, while Luna ended up delisted from all dominant crypto exchanges.
Macroeconomic FactorsIn the spring of 2022, the world faced interest rate rambles, rising inflation, and political instability due to the Russian-Ukraine war. This series of events triggered critical alerts among some investors that inflation in the post-pandemic era could impact global business development, including virtual assets. Interestingly, Bitcoin was designed to serve as a hedge against inflation on the market, but figures show that it didn’t stay immune to the painful shafts happening right now. From a psychological point of view, the general atmosphere tends to discourage investors from expanding their virtual portfolios amid insatiable times. However, experts didn’t change their estimations for Bitcoin’s future because of the momentary crisis. For example, Caleb Franzen, a market analyst for the world-renowned Cubic Analytics, asserts that Bitcoin will keep serving as an inflationary hedge in the years to come, despite the very close correlation between crypto and the traditional stock market.
The Bottom LineThere is no straightforward answer to explain the current crypto plunge — all listed factors contribute to building the public image as a driving force in establishing the prices of the circulating cryptocurrencies. The latest LUNA/UST debacle shows that we need a tighter framework for regulating stablecoins. Otherwise, they can easily take the Ponzi route without regular checkups and hence, negatively impact the upward growth of established cryptocurrencies like Bitcoin, Ethereum, Litecoin (LTC), ZCash (ZEC), and Stellar (XML). As for macroeconomic factors, we can’t control them, but we can definitely use them to our advantage. Bearish spells are the optimal time for buying stocks or cryptos as attractive financial instruments at a low price. For all other crypto-related questions, you can reach out directly to our Coin IRA team. They may be able to offer you some insight on current market conditions so you can decide what your best options are based on your risk tolerance and personal financial goals.
Coin IRA has been helping its customers establish Cryptocurrency IRAs since April 11, 2017. As we approach our 5 year anniversary, we're excited to announce the launch of our new Digital Asset Self-Trading Platform where our new and existing customers can SELF-TRADE cryptocurrencies inside their Cryptocurrency IRAs and also establish Individual NON-IRA Trading accounts -- with NO fees for setup, maintenance, or cold storage.
With our partner, Equity Trust Company, as custodian for both types of accounts, customers can invest with confidence knowing their digital assets are held by an industry leading IRS approved custodian with over 40 years of experience and $34B in assets under custody. All digital assets custodied by Equity are held in cold storage and insured against internal and external theft, physical loss and destruction, at no additional charge.
You can set up your new Cryptocurrency IRA or Individual Custody Account in less than 5 minutes, and say goodbye to Coinbase and other platforms that complicate and limit your funds transfers and trading options. Fund your IRA with a transfer from an existing IRA or rollover from an eligible 401k (or other employer sponsored plan), and easily fund your Individual Non-IRA Custody Account for the exact amount you want to trade without limitation or delay, by wire, ACH or check directly from your checking or savings account.
With our platform's clear step-by-step instructions, customers can easily navigate the setup, funding and trading process themselves, but as always, Coin IRA's Cryptocurrency Specialists are available to provide a guided experience from start to finish. With no account fees and some of the lowest transaction fees in the industry, Coin IRA's commitment to its customers has reached a whole new level of customization and convenience!
A Brief History of EthereumThe Ethereum blockchain was launched back in 2015 by a team of crypto veterans and blockchain developers led by programmer Vitalik Buterin. The idea behind Ethereum was to create an open-source, nonprofit blockchain that provides users with much more than just digital cash services like Bitcoin and Litecoin (LTC). Instead, the Ethereum blockchain aims to provide developers with programming tools and resources for launching different kinds of tokens and platforms, such as DeFi apps, exchange platforms, staking protocols, crypto games, NFTs, and virtual marketplaces. The ecosystem was powered by the Ether token, which is used to facilitate all transactions on the ETH blockchain. The project was an immediate hit, as there weren’t any similar crypto projects on the market at the time of its launch. Other altcoins were mostly copying Bitcoin by providing virtual cash functionalities. Ethereum went much further by giving real problem-solving features to cryptocurrency and providing developers with free tech tools for developing platforms.
How Does the Ethereum Blockchain Work?The ETH blockchain is a Proof of Work (PoW) blockchain, similar to Bitcoin in its basics. This means that the blockchain is fully decentralized, without any single authority or central server responsible for validating network traffic. Instead, all transactions are checked and validated by independent network nodes, i.e. Ethereum miners and their computers. Every transaction needs to undergo a rigorous validation process that requires miners to use their rigs’ hashing power to find the right hash for each transaction. When miners find the right hash, they present it to the whole network as proof of work and wait for additional confirmations before they add it to the next block of the ETH blockchain. This process consumes a lot of time and computing power, which is why miners earn a block reward of freshly mined ETH coins.
Ethereum’s Main Features
Smart ContractsOne of the revolutionary features of the ETH blockchain is the smart contract, self-executing, automated pieces of computing code that are created in order to perform certain tasks without the need for human supervision or participation. For example, a company can use smart contracts to automate the salary payout procedure for their employees, or a crypto exchange can use these contracts to enable trustless transactions between complete strangers. A smart contract operates on the basis of safe locks that make sure both parties need to fulfill their end of the deal before they can get the agreed-upon results. This way, when two strangers agree on an exchange of assets, both sides need to deposit the agreed amount of funds before they can get their share of the deal.
Decentralized ApplicationsDecentralized applications are the main utility of the Ethereum blockchain; however, without smart contracts, developers wouldn’t be able to create and launch dApps. These applications don’t use developer resources from centralized big tech companies that control all apps and platforms launched with their programming tools. Instead, Ethereum-based dApps are built with the help of the Ethereum programming language called Solidity and the Ethereum Virtual Machine (EVM). DApps can be launched for all types of businesses and entertainment purposes, from decentralized exchange platforms like Uniswap (UNI) and DeFi protocols like Curve to NFT marketplaces like OpenSea and crypto games such as Axie Infinity (AXS).
Ethereum TokensDeveloper teams that want to quickly launch their own cryptocurrency as part of their dApp or DeFi ecosystem don’t need to create a whole blockchain from scratch. They can always use the Ethereum chain to launch a crypto token, thanks to the ERC-20 token standard. This token standard includes a set of rules and parameters for launching cryptocurrencies based on the ETH network, and it’s totally free. Anyone with some programming knowledge and a solid project can launch their crypto as an ERC-20 token. This was one of the most innovative features of the ETH blockchain when it was launched because before Ethereum developers had to either create a whole blockchain from scratch or fork an existing chain like the BTC network. Another very important Ethereum token standard is the ERC-721 standard, which is the token standard for non-fungible tokens (NFTs) built on the Ethereum chain. The ERC-721 standard paved the way for key NFT marketplaces like OpenSea and played a key role in the popularization of NFTs, which are exponentially growing in terms of popularity and adoption rate.
So, How Many Ethereum Are There?Now that we’ve laid out the key characteristics of the Ethereum blockchain, let’s take a look at the numbers behind the Ethereum ecosystem.
Ethereum SupplyEthereum is PoW-based crypto that’s going through a transition process to a Proof of Stake model where mining won’t be possible anymore. Until then, the Ethereum supply is constantly on the rise thanks to miners. The easiest way to monitor the current supply of ETH coins, along with the Ether price and market capitalization, is through the Ethereum page on Coinmarketcap. The circulating supply of Ethereum is well over 100 million coins, and the number is constantly increasing. There isn’t any ETH hard cap that regulates the maximum amount of coins, unlike Bitcoin, which is capped at 21 million coins.
Ethereum’s Performance in 2021Ethereum’s GAS fees are known to be some of the highest on the crypto market, and this didn’t change for the better in 2021. In fact, Ethereum fees have only gone up thanks to the high influx of new ETH chain users. The fees are especially high during periods of high traffic when users compete with each other in so-called gas wars by setting exponentially higher transaction fees to get their transfer processed as fast as possible. The trend of sky-high gas fees is especially visible on the NFT market, which is dominated by Ethereum and received a huge increase in market cap during 2021. Around 41 billion USD worth of ETH was transferred in NFT related transactions. In terms of price action, 2021 was the best year so far for Ethereum since the coin managed to reach a new all-time high of 4,891 US dollars per coin. Although new dApp and smart contract centered blockchains like Solana (SOL) and Avalanche (AVAX) are becoming increasingly popular, Ethereum is still firmly dominating the market when it comes to smart blockchain networks with high interoperability features. Ethereum managed to constantly hold over 15% of the total crypto market cap throughout 2021, while the Ethereum mining figures remained within the optimal 18 million Ether annual amount.
A Few Ending Words…The information about Ethereum presented in this post aims to provide you with relevant knowledge about the second-largest crypto on the market in order to enable you to make your own decisions on whether you want to include ETH in your IRA or not. If this article peaks your interest in exploring Ethereum IRA options, feel free to contact one of our Coin IRA crypto specialists at 888-998-COIN.
Why Does Cryptocurrency Drop in Value?The price of cryptocurrencies swings up and down due to supply and demand dynamics. When demand for a cryptocurrency like Bitcoin rises, the prices also increase as there is only a limited supply of Bitcoin on the market. When demand falls for some reason or another, the prices also go down. In other words, the dynamic relation between supply and demand causes Bitcoin prices to swing from one end to the other, just like a pendulum. There are many forces that affect this dynamic. The value of any cryptocurrency depends on the public’s perception of its usefulness and desirability as an asset. Positive news and content about crypto, developments that make it accessible to large masses, and backing from institutional actors, all renew people’s faith in the crypto economy, while delays, hacks, negative news, scams, and disruptive government regulations create distrust and cause a fall in the overall demand. Sometimes, a sudden surge in demand can also cause an inevitable crash: When prices increase too swiftly, people become less incentivized to buy, and holders are tempted to sell-off in order to make huge profits. This is partly the reason why crypto price peaks are often followed by weeks or months of decreasing prices. But once the falling prices stabilize, the climb to the peak starts anew.
Why Did Bitcoin Crash in 2017?The first major crypto market crash took place in December 2017, triggering Bitcoin’s fall from grace that would continue up until December 2018. But before we look into why the crypto market crashed so hard, let’s discuss why crypto bloomed during 2017, crowning Bitcoin with a new all-time high price. You might be surprised to learn that the price of Bitcoin was less than 1,000 USD at the beginning of 2017. Bitcoin’s value rose steadily in the following months, surpassing the 2,500 USD mark in June 2017. Then, things took a dramatic turn: prices doubled within the next two months and then quadrupled again reaching almost 20,000 USD per BTC in December 2017. The dramatic rise of cryptocurrency prices was attributed to several reasons: Bitcoin had expanded from “OGs” (a small group of early investors) to larger audiences; more cryptocurrency exchanges were established globally; and a slew of ICOs (initial coin offerings) has created a lot of excitement, drawing millions of dollars from investors in assets that promised to be the new Bitcoin, at least in terms of investment returns. The ICO boom in particular is an oft-cited reason for the eventual collapse of the crypto market. Research shows that most tokens rolled out in ICOs (around 80%) during 2017 were little more than scams and Ponzi schemes. Though the scope of fraud hadn’t been clear by then, many expected the ICO bubble to burst towards the end of 2017. Researchers also think Bitcoin price manipulation might have contributed to the infamous crash. Economists studying Tether-Bitcoin transactions identified a pattern that shows USDT/BTC transactions by a single trader on Bitfinex exchange propped up Bitcoin prices when the prices were dropping on other exchanges, creating an artificial price bubble that popped once the year ended.
Why Did Crypto Crash in 2018?After reaching its all-time high on December 17, 2017, within 5 days, Bitcoin lost almost half of its value, falling to 11,000 USD. The fall would continue up until January 2019, with Bitcoin settling at around 3,500 USD. These days, the crypto crash of 2018 is regarded as almost inevitable: As a growing and completely unregulated market, crypto is more than vulnerable to frauds and thieves, and evokes FOMO like no other, partially because the promised returns are impossibly high. The combination of these factors reached its peak in the ICO boom, creating an unsustainable bubble growth that could only pop, washing away millions of dollars of investment. The falling crypto prices and lack of any development from many token projects, or outright disappearance of project managers, caused a sell-off panic that created a snowball effect on crypto prices. Add the alleged effects of Bitcoin price manipulation by large Tether holders to the equation, and you get the 2018 crypto crash.
Causes of the Biggest Dips in 2021Bitcoin surpassed its all-time high not once but twice in 2021. In April 2021, Bitcoin prices reached $64,000 per BTC. But the peak didn’t last long and Bitcoin lost more than half of its value in May 2021, falling as low as 30,000 USD. Elon Musk’s announcement that Tesla would no longer accept Bitcoin payments due to Bitcoin’s environmental impact, the Chinese ban on cryptocurrency mining that evaporated half of the Bitcoin network’s hashing power, the US Department of Justice investigation of stablecoin Tether, and remarks by government officials that new crypto regulations are on the way are all thought to have contributed to Bitcoin crash. But the asset recovered and began to rise again in September, and reached an all-time peak in November by surpassing 66,000 USD before prices began falling once again, sliding down for weeks. There is ample cause for the latest price dips. Just as crypto mining recovered from the Chinese government’s earlier ban, another regulation from China’s central bank outlawed all cryptocurrency transactions (which had continued through foreign markets after the government’s previous regulations), crippling one of the largest crypto markets in the world and decreasing Bitcoin price. Another blow to the Bitcoin market came with the announcement that the now-defunct Mt.Gox exchange would re-distribute 140,000 BTC among the former Mt. Gox customers who lost a staggering amount of Bitcoin to an infamous hack. These newly-released 140,000 BTC would not only increase Bitcoin’s supply drastically but could also drain the little liquidity in the market if investors decide to cash out.
Final WordsAll the factors above are contributing to Bitcoin’s downward slide, but of course, as you might have realized by now, peaks and crashes are actually a normal part of Bitcoin’s growth. Price peaks are often, in time, followed by crashes that give way to new peaks, as the causes of these nerve-wracking drops work themselves out, and Bitcoin believers hold on for the next higher high or buy more at a bargain price. In other words, Bitcoin grows cyclically, and price drops can be an excellent time to delve into the crypto market. If you are interested in investing in Bitcoin but find yourself wondering and worrying about recent prices, you can reach out to one of our Coin IRA specialists to get the latest market news and learn how to take advantage of “buying the dips”.