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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!