Crypto Academy Contest / S1W4 – Reviewing the Instability of the Crypto Market by @srrebullient

Hello everyone, I am glad to be taking part in the third week of the SteemitCryptoAcademy engagement contest.

In this week's contest which is titled The Instability of the Crypto Market, we have been asked to talk about the current happenings in the cryptocurrency market.

• What do you think of this drop

The cryptocurrency market as we all know is volatile and that is why it is always advised for one to trade or invest what one can afford to lose because sometimes it doesn't just end with making proper research or being careful.

The volatility in is cryptocurrency mostly caused by the rate of demand, supply, and traders' psychology which tends to affect the market either positively or negatively.

The current decline in the prices of various cryptocurrencies is actually not a thing of huge surprise as this is not the first time something of such is happening we witnessed something similar last year following a regulation by the Chinese government and an announcement made by Tesla CEO in the person of Elon Musk who stated that Telsa will no longer accept Bitcoin as a payment method due to environmental concerns.

The above effect came just after cryptocurrencies have just witnessed what could be regarded as its all-time best era which started late 2020 to early 2021 thus seeing Bitcoin move above $60k. The positive impact of cryptocurrencies came as a result of public adoption by various popular companies such as Amazon, Telsa, Microsoft, etc. But after the negative announcement by Telsa and the regulation by the Chinese government during mid-2021, a sharp decline which saw below reaching $30k witnessed.

Having read through the above, it will be easier for us to conclude that various activities such as news headlines, information, and other activities related to cryptocurrency affect traders' and investors' psychology thus leading to a massive sell-off or adoption which in turn affects the price.

And with that being said, this current drop is not alien as it must have happened following a massive sell-off which is a result of panic on the side of users.

• Causes of this current drop and how long it might last

The current drop in the cryptocurrency market isn't something that started recently but it is something we have been witnessing since this year following much FUD centered on the U.S as a result of the bill passed to mandate tasks on cryptocurrency brokerages.

In as much as the above bill created much FUD in addition to what was created by the Chinese government last year, they were still not enough to stop the rally of the cryptocurrencies such as Bitcoin which was eager to break above $40k with Ether trading above $3k and the world largest cryptocurrency Exchange (Binance) having an increased trading volume of almost 65%.

The cryptocurrency success continued until what we witnessed last week which passed shocking waves across the entire cryptocurrency world.

It all started on the 9th of May when we witnessed a slight drop in the value of UST following an attack regarded as Wormhole hack. This attack saw the TerraUSD stable coin drop from its $1 value to 0.98 cent thus making users dump it for other competing stable coins on curve finance.

The dumping was quite much and about $1.92 million worth of UST was dumped for the likes of USDT and USDC. This dump further lead to a more drastic drop in the price of UST which also affected Luna through a mint and burn mechanism that both sister tokens share.

The on-chain mint and burn mechanism helps in maintaining the price of UST pegged to $1 as users are required to burn $1 worth of Luna whenever they want to acquire 1 UST and vice versa but as the value of UST has already gone too below $1, the mechanism became entirely crippled jeopardized.

Following the on-chain mint and burn mechanism of Luna and UST, the dumping of UST led to a massive minting of Luna tokens thus drastically increasing its circulating supply and thus making Luna holders rapidly sell off which lead to the rapid crash of Luna.

Luna's initial supply has since then moved from 1 billion to where it is currently at 6,907,376,873,283.

• See below

Following this incident, during the initial unpeg of UST, the Luna Foundation Gaurd (LFG) loaned out 42.5k BTC which was approximately $1.5 billion from their Bitcoin reserve which they claimed would be given to professional market markers in defense of the liquidity around UST peg.

• See below

This incident was interpreted to be that the LFG is trying to leave their Bitcoin position. This further created panic in the minds of investors who also started dumping BTC which in turn led to the general dumping of various cryptocurrencies.

This whole issue started with the wormhole attack which lead to an unpegging of UST from the US Dollar.

• How long do you think it will continue in this downtrend

What lead to the downtrend was basically fundamentals and a lot of sentimental effects but currently it is as though the sentiments have reduced and for us to know when the downtrend is likely to end, we should look at the technical part and do this, we will have to use Bitcoin which is obviously the market controller.

• See below

Looking at the above technical analysis on a 1-day chart, we will see that BTC is currently in a support zone around $29k, and an applied RSI indicator is showing strongly oversold thus indicating a pullback which I believe will see BTC back up to $36k - $40k in few days or week from now depending on the level of market volatility.

Further looking back on the chart, we will also see a possibility of BTC moving down to $20k - $19k if it breaks the current $29k support.

• See below

If there should be no more FUD setting in the market, then the current support is enough to put an end to the current downtrend thus leading to some bullish movements in the general cryptocurrency market.

Trading volume is simply the sum of the total inflow and outflow of capital on a cryptocurrency within a given period. This shows the level of monetary activities going on on various exchanges regarding a given crypto asset.

Despite the decline in value of various cryptocurrencies, the trading volume of major coins such as Bitcoin did not reduce as while some persons are busy selling off, there are still some persons who were taking advantage of low prices in accumulating more thus leading to an almost stabilized trading volume.

This can be justified by the slight drop in price in the value of USDT from its initial $1 value pegged to the US dollar to where it is currently trading at $0.998

• See below

The USDT lost its peg after we saw Bitcoin move to what could be regarded as the lowest it has been seen this year which is around $26k. The unpegging of the USDT could be interpreted to be as a result of a massive shift in demand as holders started buying Bitcoin with their stored USDT in other to buy at a lower price thus leading to a slight drop in USDT value.

The above clearly shows that even though there's a decline in cryptocurrency values, major coins still maintain stability in volume due to a lot of buying and selling currently going on.

Traders who are taking advantage of market movements are also trading using these major coins, especially Bitcoin and this is also adding to its stable volume.

• See below

TerraUSD is an algorithmic stable coin that is pegged to the US dollar using an on-chain mint and burns mechanism with its sister token Luna. This implies that users tend to burn $1 worth of Luna in other to acquire 1 UST which is expected to remain at $1 but the dump on UST following the wormhole attack saw the price of UST move below $1 thus crippling the on-chain mint and burn mechanism of UST and Luna thereby making it impossible for users to redeem either Luna of UST for Bitcoin which serves as a reserve currency for the algorithmic stable coin.

This further led users to concurrently dump UST and Luna thus leading to an excessive mint of Luna which saw its total supply move from 1 billion to 6 trillion in less than a week.

Fact that there's the inability for the on-chain mint and burn mechanism to continue, the whole Terra ecosystem became jeopardized.

• Will there be a bounce-back?

I so much doubt that UST will come back to its $1 peg and Luna back to $1 with my reason being that investors already lost a huge amount of money on the project and that has revealed how unstable algorithmic stable coins can be.

With this in mind, cryptocurrency enthusiasts will rather make use of stable coins such as USDT and USDC in farming and exploiting their arbitrage opportunities because these stable coins are backed up by dollars in bank accounts thus making it more stable although a bit centralized.

On the side of Luna, it will be rather impossible for the native token of Terra blockchain to get back to $1 because of its increased supply which is currently at 6,907,376,873,283. This means that if it gets back to $1 the total market cap which is calculated by multiplying the value of the coin with its total supply will be $1 × 6,907,376,873,283 = $6,907,376,873,283. This clearly shows that the market cap of Luna will have to be $6 trillion and that's way above the market capitalization of the entire cryptocurrency which is $1,282,621,283,918.

It is various most obvious that the above can't be possible therefore to get Luna back to $1, a reasonable amount of Luna tokens will be burnt and that is also almost impossible because 70% of the available Luna tokens are currently not in the possession of Luna Foundation Guard (LFG) and they can only buy it if owners are willing to sell.

The downtrend of the entire cryptocurrencies obviously did not leave Steem behind. Steem blockchain which is built to reward content creators using its native token (Steem) has been proving value through the various quality contents of users on the Steemit platform.

The downtrend saw the price of Steem and its sister stable coin SBD move below move than -30% thus leading to a debt ratio of above 27%. The debt ratio which is calculated by diving the SBD market supply with the STEEM market supply is normally maintained below 9% when the market is in a bullish movement and once there's a huge downtrend and the debt ratio moves above 10%, the SBD production will be halted until the market recovers and the ratio goes below 9% again.

This whole incident has actually caused me stress because due to the lack of SBD printing, I tend to redeem rewards far below what I initially earned.

For instance, my vote reward of $35 by steemcurator01 was reduced to $26 during the downtrend and further left me redeeming just 45 Steem + SP as a result of the unavailability of UBD and this could be summed up to be just $12 as at the time of writing this.

• See below

The above is just one of the numerous examples.

But I am still confident in the project and currently, there have been some changes to the reward system and SBD printing which has moved from its initial 0 to 600 at the time of writing this.

• Previously

• Currently

The general downtrend in the cryptocurrency market has resulted in a lot of heartbreak due to some investors losing over 50 percent of their invested capital but this is not a new thing in the cryptocurrency market so I believe that we all will be back up soon.

My heart goes out to Luna investors who have lost all their Luna investments with almost no possibility of getting them back.

Stand strong..