The cryptocurrency world took a beating last week. The price of bitcoin fell to lows not seen since 2020; Coinbase, the largest cryptocurrency exchange, saw its stock plummet; and a prominent “stablecoin” called Terra, along with its associated cryptocurrency, Luna, collapsed.
In response, crypto naysayers took to Twitter to dance on bitcoin’s grave, and subreddits that had once been filled with celebrations of booming crypto portfolios were soon filled with people posting numbers for suicide hotlines and desperate personal stories about lost fortunes.
Some of the downturn in the crypto market can be explained by the fact that cryptocurrencies now closely track the stock market, and so the same global factors that battered the S&P 500 and Dow Jones Industrial Average also battered bitcoin: another month of high inflation, the Federal Reserve hiking interest rates, slow economic growth, and supply chain disruptions stemming from Russia’s war against Ukraine and China’s zero-COVID policy.
But it’s impossible to understand what’s happening with bitcoin without understanding the role of Terra’s collapse and what it might say (or not) about stablecoins, which are integral to the cryptocurrency ecosystem.
As the name suggests, stablecoins are non-volatile digital currencies that are pegged to the dollar. This peg is ostensibly “backed by reserves like dollars, U.S. Treasury bonds or other traditional assets,” reported The New York Times last week. That…
