Terra, a popular blockchain protocol that supports decentralized stablecoins pegged to fiat currencies and uses bitcoin reserves to protect such pegs, lost more than 99% of its value in May 2022. This sparked one of the most brutal crashes in the crypto market in recent memory.
In the second week of May 2022, as the crypto market experienced a severe downturn, the flagship digital assets of Bitcoin and Ethereum lost almost 40% in value in a few days, shedding over $600 billion. Bitcoin traded to $25,400 on May 12 from $40 a week earlier, while Ethereum lost almost half of its value, falling from $2,900 to $1,700 over the same period. Younger altcoins have fared worse as the cryptocurrency industry is caught in a wave of panic selling and mass liquidations.
It is perhaps worth noting that cryptocurrencies are not the only industry in decline. A chaotic week of losses for cryptocurrencies came as inflation and a deepening post-pandemic recession hit global stock markets. Global indices are at yearly lows, while inflation in parts of Europe and the Americas is at its highest level in decades.
While the circumstances surrounding the event saw Bitcoin react to the same dynamics of risk assets globally, Terra appears to have a clear scapegoat. A blockchain payments platform comprised of two algorithmic stablecoins, Terra lost nearly all of its value during this period, losing tens of billions of dollars in value and wiping out the portfolios of thousands of cryptocurrency investors. Its unraveling sent further shockwaves into the crypto market, fueling a sell-off that has dented investor confidence in stablecoins and the solution to cryptocurrencies’ overall volatility.