Crypto crash explained: Why price of Luna and Bitcoin crashed and if experts think cryptocurrency will recover

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Cryptocurrency prices have recovered slightly, after crashing further earlier this week.

However, Bitcoin’s value remains less than half of the record high it hit in 2021, while Luna is valued at less than a cent following its dramatic collapse.

Bitcoin and Ethereum have both climbed by around 7 per cent over the last 24 hours.

Other coins made larger gains – XRP has grown by around 19 per cent, Solana by 17 per cent and Cardano by 21 per cent.

Shiba Inu and Polkadot were among the biggest winners, growing by 29 and 38 per cent respectively.

The growth will give some hope to crypto investors after a tumultuous week, and a difficult start to 2022 in general.

What are the current crypto prices?

Here are the prices of major coins as of Friday afternoon:

  • Bitcoin – $30,700 (£25,200)
  • Ethereum – $2,120 (£1,740)
  • XRP – $0.45 (£0.37)
  • Solana – $55.10 (£45.20)
  • Crypto.com – $0.20 (£0.16)
  • Cardano – $0.58 (£0.48)
  • Avalanche – $37.20 (£30.50)
  • Polkadot – $11.70 (£9.60)
  • Dogecoin – $0.094 (£0.077)
  • Luna – $0.0014 (£0.0011)
  • Shina Inu – $0.000014 (£0.000011)

Why did cryptocurrency crash?

The general mood around cryptocurrencies has cooled.

Investors appear to be moving away from cryptocurrency and towards less risky investments in the face of global inflation.

The crash is also linked to the coin terraUSD (UST) collapsing after losing its peg to the dollar, which has also all but wiped out Luna, its support coin.

Shares in Coinbase, the largest crypto exchange in the US, dropped 15.6 per cent overnight on Tuesday after it posted net losses of $430m (£348m), far worse than analysts were expecting.

Coinbase cited a “trend of both lower crypto asset prices and volatility that began in late 2021”, but was quick to point out that it does not expect these conditions to be “permanent”.

The news raised questions about whether the market has reached an expected cooling-off period – previously dubbed a “crypto winter” – or a more permanent chill, perhaps a “crypto ice age”.

Simon Peters, crypto market analyst at trading platform eToro, said: “The concern now for cryptoasset investors is when the slide will end.

“The market is caught in the wider adversity of investment markets that are battling to decide where confortable levels are in the wake of interest rate hikes designed to quell soaring inflation around the Western world.”

What happened to Luna?

Luna and TerraUSD (UST) are both native tokens of the Terra network, a blockchain-based project developed by Terra Labs in South Korea.

CoinDesk explains: “The Terra blockchain is built on Cosmos SDK; a framework that allows developers to create custom blockchains and build their own decentralised applications on top of Terra for various use cases.

“As of now, The Terra ecosystem contains more than 100 of these natively built projects. These include non-fungible token (NFT) collections, decentralised finance (DeFi) platforms and Web 3 applications.”

The goal of Terra is to be a peer-to-peer electronic cash system.

It aims to do this through the use of “stablecoins”, which are cryptocurrencies pegged to a real-life currency.

UST is pegged to the US dollar, which means one UST is supposed to be worth around the same as one dollar. Luna plays a vital part in this.

CoinDesk explains: “Instead of relying on a reserve of assets to maintain their peg, UST is an algorithmically stabilised coin. This involves using a smart contract-based algorithm to keep the price of UST anchored to $1 by burning (permanently destroying) Luna tokens in order to mint (create) new UST tokens.”

In the Terra ecosystem, users can always swap the Lina token for UST, and vice versa, at a guaranteed price of $1 – regardless of the market price of either token at the time.

However, this week Luna crashed due to Terra losing its peg to the dollar, due concerns over the Federal Reserve’s looming interest-rate hike.

This sent its price tumbling through the floor.

Leading crypto exchange Binance temporarily suspended withdrawals on Luna on Wednesday, and on Thursday night the Terra blockchain officially halted.

Terra said it made the move to “prevent governance attacks”.

The coin has the potential to recover, but at present things are extremely uncertain.

Do Kwon, founder of Terra creator Terraform Labs, tweeted on Tuesday: “Close to announcing a recovery plan for $UST. Hang tight.”

He added on Wednesday: “I understand the last 72 hours have been extremely tough on all of you – know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this.

“The Terra ecosystem is one of the most vibrant in the crypto industry, with hundreds of passionate teams building category defining applications within… Terra’s return to form will be a sight to behold.”

Investing advice site Investing Cube has speculated there is a “good chance” the cryptocurrency could recover.

Analyst Kelvin Maina wrote: “For Luna to recover, they will need to address the problem and show clearly that such a drop will not happen again. As an analyst, I expect to see a bump in Luna prices after UST is pegged back to the dollar. I also expect the prices to start recovering after the Terra project shows that similar problems will not happen in the future.”

Members of Luna’s devoted subreddit have been lamenting their losses on Reddit. A subreddit is a subsidiary thread or category within the Reddit website.

“I lost over $450,000, I cannot pay the bank,” one wrote, while others have mentioned potentially losing their homes.

More from Cryptocurrency

Will cryptocurrency recover?

Cryptocurrency is showing signs of recovery, aided by Bitcoin climbing back above the $30,000 threshold.

One factor that could provide hope to crypto investors is that big players are starting to join the party.

On Wall Street, JPMorgan Chase, Morgan Stanley and Goldman Sachs are among the firms that n dedicated cryptocurrency teams. Meanwhile, mainstream hedge funds, managed by the likes of Alan Howard and Paul Tudor Jones, are pouring billions into digital currencies.

Some of the provisions in the Queen’s Speech aim to target those who use cryptoassets to conduct fraud, but little has been said about how to protect individuals who chose to invest in them.

A swing from the regulatory hammer could send cryptocurrencies sliding even further, while swift decisions may preserve any inherent value that is there.

Brian Nick, chief investment strategist at Nuveen, told Bloomberg: “What gets punished when financial conditions are tightening? Anything with a high valuation and an uncertain or non-existent revenue stream,

“And crypto has inarguably high valuations and no revenue stream. That’s very much of a piece with what we’re seeing in growth stocks, tech. It’s correlated but obviously it’s more volatile because the market is less liquid.”

How risky is cryptocurrency?

People invest at their own risk and cryptocurrencies are not regulated by British financial authorities.

All crypto investments are risky, but meme coins like Shiba Inu are particularly volatile, and you should be prepared to lose everything you invest.

The Financial Conduct Authority (FCA) warned in January: “Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money.

“If consumers invest in these types of product, they should be prepared to lose all their money.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown previously explained the risks to i.

She said: “On top of being extremely volatile, most cryptocurrencies are unregulated, which not only adds another layer of uncertainty but also means that investors have little or no protection against fraud.”