12.05.2022 – Things are getting dicey for Bitcoin now: the largest cryptocurrency has breached the important $30,000 mark. Much of this bearish situation is the fault of its hunchback kin: the culprit is the stablecoin Terra. We explain the background.
This does not look good for the bulls. The long-term support at around $30,000, which has been built since January 2021, has been torn, as you can see from the upper red line in the daily chart. Although in this oversold situation, a countermovement would be called for once. Especially since the recent downward trend has torn two price gaps that want to be closed again – see gap 2 and gap 3. But this can take half an eternity, as you can see from gap 1.
We recently explained the factors behind this. Above all, the general risk aversion that is spilling over from Wall Street is causing sales. In addition, inflation was somewhat weaker, but higher than feared. In April, consumer prices climbed 8.3 percent compared to the same month last year. In March, the inflation rate had been 8.5 percent. Thus, inflation in the U.S. has moderated for the first time since August 2021. Actually, such high inflation should drive investors into assets that cannot be eroded by the Federal Reserve via an increase in the money supply.
Reserves are being liquidated
On the other hand, it’s only a matter of time before the economy suffers and many people end up unemployed – living off reserves. According to data from digital asset manager Coinshares, investors have pulled about $300 million out of cryptos since mid-March, including $250 million from Bitcoin alone. In addition, as the Fed tightens the interest rate screw, other assets such as government bonds become more attractive, as coupons yield interest.
But there is another reason for the Bitcoin debacle: The third-largest stablecoin TerraUSD just ran into severe turbulence. Such stablecoins are supposed to fluctuate closely around the dollar equivalent. However, this peg was of no use – on Tuesday, Terra dipped down to 60 cents. Its sibling currency Luna, which floats freely, reported a loss of more than 90 percent in a week.
Singapore-based cover consortium Luna Foundation had initially tried to raise fresh money. Terra creator Do Kwon wanted to raise more than $1 billion in fresh money, according to CNBC. Further, he tried to prop up Terra’s price by selling his bitcoin token reserve worth about $2 billion. However, yesterday Terra collapsed to less than 30 cents. Things have since calmed down a bit here, so as you read these lines, everything may have turned around. The whole thing could also have been a concerted short attack on Terra and thus BTC: according to the financial blog “ZeroHedge”, however, major investors BlackRock and Citadel denied any attack on Terra’s dollar peg.
Analyst sees BTC at 17,000
Our conclusion: the mixed situation is confusing, and what is happening behind the scenes is difficult to grasp. The only fact is that Bitcoin has dipped into a precarious chart region. On a technical basis, analyst Jeffrey Halley of forex broker Oanda expects the bitcoin price to slide as low as $17,000. We are curious to see what happens next and will keep you updated!
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