The last few days have seen a cryptocurrency bloodbath, and the declines may not be over. Put simply, the world economy is going to hell, and crypto is coming with it.
There are a combination of factors behind the precipitous drop. Wider economic issues are certainly a major factor. Rising inflation and the rapid raising of interest rates to combat it are adding major cost of living pressures. Wages aren’t rising enough to offset it, meaning people have less purchasing power. Flow on effects including rising energy prices and falling asset value are creating conditions that are ripe for a major economic downturn.
Then there's the war in Ukraine. It's becoming a hard slog with no real prospect of a quick ending. Russian blockades mean Ukraine cannot export its food supplies—particularly grain—which is leading to spikes in food prices and could lead to famine in many areas that are suffering from food shortages anyway.
Crypto faces its own problems on top of these wider economic issues. There’s the recent collapse of the Terra Luna ecosystem(opens in new tab) which pummelled markets, but that’s not all. On Monday the DeFi platform Celsius announced an operational halt, putting billions of dollars' worth of assets at risk.
As the value of the underlying assets tumbles, so does the risk of more crypto project failures. Negativity continues to swirl around the stablecoin, Tether(opens in new tab), mostly due to a lack of transparency over its reserves. If it were to lose its USD peg, then it will make the recent Terra Luna collapse look like someone losing a buck in a vending machine.
Well, not quite, but you get the idea.
Tether is the third largest coin by market cap and it is vital that it maintains its 1:1 USD peg.
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