Bitcoin crash: Coinbase share price rally after crypto exchange price fall, concerns about stablecoin TerraUSD

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50 percent loss in five trading days:

The price of the world's largest crypto exchange Coinbase has collapsed - as has the promise of the "stable coin" Terra USD

Photo:

Richard Drew/AP

For investors in the crypto market, double-digit price fluctuations within a day are normal.

But what crypto investors have experienced in the past few weeks should also get on their nerves.

The world's largest and best-known cryptocurrency, bitcoin, has accelerated its slide this week, falling as low as $27,000 at times, a loss of more than 50 percent from the record high set in November 2021. The market cap of all cryptocurrencies is $3 trillion over the period melted down to around a trillion dollars.

Anyone who invested in the shares of the world's largest crypto exchange Coinbase experienced such a price drop in fast motion: A week ago, the Coinbase share was still quoted at 102 US dollars and on Thursday at times fell well below the 50 dollar mark.

A total of 50 percent loss in value within five trading days.

Since hitting a record high in mid-November, when Coinbase surged to $350 in step with Bitcoin's rally, the company has lost more than 80 percent in value.

On Friday, both Coinbase and most cryptocurrencies such as bitcoin and ether began to recover and increased again in double digits.

Speculative investors are hoping for a backlash after the sell-off and are gradually getting back in.

But the question remains: How can that be?

Can the rapid fall be explained solely by the fact that investors expect interest rates to rise significantly and are therefore reducing their risky investments?

The US Federal Reserve's interest rate hikes, persistently high inflation and investors' increasing interest rate expectations are important factors for investors to reduce their investments in the speculative crypto market.

But this week there were two more factors that caused a lot of excitement in the market.

Coinbase shocks investors with quarterly figures - and starts recovery rally

First of all, the crypto exchange Coinbase shocked many investors with its quarterly figures on Tuesday.

The cryptocurrency platform has suffered a 35 percent drop in revenue to $1.17 billion in the first quarter.

Trading volume also fell to $309 billion in the quarter ended March from $335 billion in the same period last year.

In addition, the company wrote a net loss of $429.7 million after a net profit of $387.7 million in the same period last year.

The high volatility in the crypto market has prompted investors to look for other investment opportunities - which does not bode well for Coinbase's growth story.

Investors also got really nervous because the stock exchange operator routinely pointed out in the quarterly figures that investors could lose their crypto assets in the event of Coinbase's insolvency.

These are not special assets, but are considered part of the insolvency estate in the event of insolvency.

Regardless of how likely or unlikely bankruptcy of the crypto exchange is: the mere mention of such a possibility drove numerous other investors out of the share in an already nervous environment.

Alleged "stablecoin" TerraUSD collapses

The collapse of the alleged stablecoin TerraUSD (UST) also caused extreme concern this week.

The courses of the so-called stablecoins are linked to other values ​​such as the US dollar or gold.

This is intended to avoid extreme fluctuations, as are the order of the day with Bitcoin or Ethereum.

For example, the best-known and largest stablecoin "Tether" is tied to the USD dollar.

However, unlike Tether, TerraUSD is a so-called “decentralized” stablecoin.

Here, a complex mechanism of trades with other cryptocurrencies should automatically keep the course at one US dollar per TerraUSD.

However, this obviously did not work: This week TerraUSD collapsed and at times fell below the 10 cent mark.

The slump raised doubts about how stable "stablecoins" can really be in times of high volatility.

Even the stablecoin Tether, which is tied to the dollar, fell to 95 cents at times in the course of the Terra crash and thus below the 1 dollar mark.

Again, this doesn't exactly work as a confidence-building measure for the market.

Bitcoin, Ether, Tether and Coinbase stock recovered noticeably on Friday.

But according to the analysts at Morgan Stanley, another stress test for the market could follow with the next wave of sell-offs.

Investors trust that stablecoin providers will still have enough liquidity even in times of falling prices - when this trust dwindles it becomes dangerous, "TerraUSD's price peg collapse had some ugly and predictable side effects," said Richard Usher, manager at financial service provider BCB specializing in digital currencies.

Against this background, governments want to push regulation of the sector.

Ashley Alder, head of the World Organization for Securities and Exchange Commissions (IOSCO), signaled the creation of an international cryptocurrency authority for next year.

In addition to climate change and the pandemic, this is the third important issue for governments.

The US Federal Reserve had recently warned of falling prices for stablecoins because the value of deposits, which are supposed to guarantee price fixing, could fall in turbulent times on the stock exchange.

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