Soaring inflation is just one driver of broad losses across the crypto markets.
Cryptocurrency prices are down amid a slew of grim economic news. With potential factors as disparate as the war In Ukraine, rising inflation and the Fed's corresponding interest rate hikes, the price of a variety of cryptocurrencies has dropped in recent days, continuing a months-long downward trend. On Monday morning, the price of bitcoin fell below $30,000 for the first time since July 20.
As of Tuesday afternoon, bitcoin was down more than 50% from its highest valuation of $67,582.60 on Nov. 8. Over the weekend, bitcoin and ether, the two largest cryptocurrencies by market cap, shed approximately 20% of their respective values.
Further complicating the situation is the unraveling of one of the more popular so-called stablecoins, which are tokens pegged to some other underlying asset, such as the US dollar. (Read more about stablecoins and how they work.)
On Monday, one of the largest stablecoins, called terraUSD, lost about 30% of its value, making it redeemable for only 69 cents instead of its target $1 benchmark. As of Tuesday afternoon, terraUSD was valued at approximately 81 cents per coin. Cryptocurrency traders use stablecoins like terra as a go-between for other, more volatile cryptocurrencies, like bitcoin. Instead of buying or selling bitcoin or ether with US dollars, traders use stablecoins to make faster, less expensive transactions.
Terra's value isn't supposed to fluctuate or dip below $1. In response to the price drop, Terra's corporate parent called on its own cryptocurrency reserves to capitalize its token.
Stablecoins are an integral part of the overall crypto market. The aggregate value of stablecoins grew to more than $180 billion in March 2022, according to a report published by the Fed on Monday. That same report warned investors that stablecoins could become "illiquid during stress," making them prone to runs -- when depositors attempt to withdraw an asset en masse, which has a negative impact on the price.
On Tuesday, Binance, the world's largest cryptocurrency exchange, halted withdrawals for terraUSD and the related Luna cryptocurrency, which also runs on the terra network. Binance said it did so "due to a high volume of pending withdrawal transactions," and it resumed terra withdrawals early Tuesday morning.
That a popular stablecoin like terra has now lost its "peg" to the dollar could portend broader challenges in the crypto markets. But headwinds are being seen throughout the financial system. The Dow Jones Industrial Average has repeatedly closed lower in recent days and the S&P 500, a large fund that people commonly use to gauge the health of the stock market, is also down considerably from last week.
"The Ukraine war, a global energy shock and the risk the Fed tries to fight the supply-driven inflation have sparked a reassessment of macro scenarios among market participants," Blackrock analysts wrote on Monday.
In March, the inflation rate hit 8.5%, the highest it's been in 40 years. In response, the Fed raised interest rates by 0.5% with the hope of stabilizing the economy. Recent data from the Bureau of Labor Statistics shows that inflation has receded slightly year over year, up 8.3% in April, but it's still at a record high.