Cryptocurrencies resumed declines as the collapse of the TerraUSD stablecoin triggered a flight from many popular digital tokens. 

Bitcoin shed as much as 6.1 per cent on Thursday (May 12), falling below US$27,000 to the lowest since December 2020. Ether slid up to 12 per cent, while tokens like Avalanche and Solana that underpin some key decentralised finance protocols also retreated. 

Virtual coins had earlier posted double-digit intraday percentage gains but the rally fizzled. The TerraUSD stablecoin was still below it US$1 intended peg, while the affiliated token Luna tumbled. 

The crypto sector overall is nursing heavy losses for the week, and sentiment remains fragile. Stablecoins are key elements of the crypto market, where traders park funds as they move in and out of other tokens. The various stablecoins taken together are worth well over US$100 billion, and a widening loss of confidence could be an existential test for the digital-asset ecosystem.

The TerraUSD algorithmic stablecoin — also known as UST — has been bouncing between 30 and 90 US cents , and was around 66 cents as at 6.18 am in London. Backers of the coin are trying to raise about US$1.5 billion to shore up the token after it crashed from its US dollar peg, according to the founder of a firm that was approached about the deal. 

“The downfall of the stablecoin UST has impacted the crypto market to a great extent,” said Edul Patel, chief executive officer of Mudrex, an algorithm-based crypto investment platform. While Bitcoin has often rebounded quickly from crashes in the past, this time it could have further to fall, he added.

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“Is the market getting spooked by what’s happening with Terra? The answer is yes,” said Craig Johnson, chief market technician at Piper Sandler. “Money-market funds are important to investors, and right now we’re questioning the third-largest money-market fund in crypto land. People did not think we were going to break the buck on that, and that’s clearly happened.”

Crypto sentiment was also hurt by elevated US inflation, which points to aggressive interest-rate hikes — an unfavourable environment for risk assets. “There is extreme fear across the crypto market,” said Marcus Sotiriou, an analyst at the UK-based digital-asset broker GlobalBlock. 

The area around US$30,000 had been an “especially sensitive zone”, for Bitcoin, wrote James Malcolm, head of foreign exchange and crypto research at UBS. That is where mining economics turn negative, “which could potentially lead to increased coin sales by this key cohort”, he said.

Meanwhile, Coinbase Global shares and bonds fell to new lows on Wednesday, signalling investor scepticism about the prospects of the crypto exchange in a bear market. The company reported lower-than-expected revenues, and warned that trading volume and monthly transacting users in the second quarter is expected to be lower than in the first. 

Piper Sandler‘s Johnson said that is another concern for crypto investors now. “It’s the largest exchange here in the United States, and they just turned a loss,” he said, adding that Terra’s troubles are all “snowballing in crypto land”.

Still, a lot of crypto investors, cognisant of the fact that Bitcoin has gone through a boom-and-bust cycle before only to recoup losses over and over again, are preaching patience. 

“Ultimately, every investor needs to size positions based on their risk level and time horizon,” said Alex Tapscott, managing director of the digital asset group at Ninepoint Partners. “We believe Bitcoin will recover and that we’re still in the early stages of this new Internet of value. Keep calm and HODL (hold on for dear life).” Bloomberg