Crypto Collapse Sends Bitcoin and Ethereum Down at Least 28% the Past Week

Bitcoin declined nearly 4% over 24 hours and 28% this past week, while Ethereum has dropped more than 11% over the past day and 33% over the past seven days at press time.

The past seven days have been brutal for the entire cryptocurrency sector. According to CoinGecko, the valuation of the entire crypto market is currently at $1.278 trillion at the time of writing, which is $578 billion lower than last Wednesday, marking a 30% drop across the crypto board.

The two largest cryptocurrencies by market value -- Bitcoin (BTC) and Ethereum (ETH) -- have not been immune to the market fallout. This morning, CoinMarketCap showed that Bitcoin fell to $26,350.49. You'd have to go back to December 2020 to see BTC at that level. It's a similar story for Ethereum, which crashed through the psychological threshold of $2,000 earlier today, down to $1,748.30, marking its worst price position since March 2021.

Analysts are citing various causes for this crypto collapse including higher-than-expected inflation numbers this week and the Federal Reserve's half percent interest rate increase last week. However, the most significant contributor has to be the contagion caused by the ongoing flameout engulfing the supposed stablecoin TerraUSD (UST) and its sister cryptocurrency Terra (LUNA).

The Terra stablecoin contagion

Both UST and LUNA were created by Terraform Labs, with UST designed to be a stablecoin pegged to the value of the U.S. dollar. As an algorithmic stablecoin, UST relies on its software to automatically adjust both its supply and LUNA's to correctly calibrate the UST price to the dollar peg on a continuous basis. However, a series of unexplained events over the past few days overwhelmed the UST failsafes -- dragging down LUNA and the rest of the crypto space as well.

"There is a lot of uncertainty around LUNA right now -- the project is really ambitious and the objective an admirable one but just what the effect on the LUNA token itself will be is unclear," Director and lecturer at the Swinburne University of Technology, Dimitrios Salampasis said in an email statement received this morning. "Algorithmic stablecoins are considered as being inherently fragile and are not stable at all. In my opinion LUNA will exist in a state of perpetual vulnerability."

Yesterday, the cofounder of Terraform Labs and its developers outlined a drastic recovery plan with several parts including removing a large number of UST from circulation, while minting millions more of LUNA coins, as well as securing more collateral as a depository backstop. It'll be a while before we know if those measures are enough to repair the valuation damage to both UST and LUNA.

However, the reputational damage sustained by the entire cryptocurrency asset class in the form of fear, uncertainty, and doubt is likely to endure well into the future.