The cryptocurrency market has been on a roller-coaster ride ever since it reached its peak in 2020. After one of its worst selloffs, investors are worried and wondering why cryptocurrency values have become increasingly vulnerable to stock market fluctuations.

Growing inflation, lingering pandemic, geopolitical crises around the world, and concerns about the Fed’s tightening monetary policy are all affecting crypto markets.

Looking at some of the data, the market value of cryptocurrencies last November was around $3 trillion. By mid-April, this fell to $2 trillion dollars and now to $1.3 trillion. Bitcoin has fallen below $29,000 for the first time since late 2020.

The implosion of terraUSD, a sort of stablecoin, and moves by the US Federal Reserve to combat rising inflation and stabilise markets could be two factors that are driving the recent slump in the crypto market.

UST and its effect on luna

TerraUSD, otherwise known as UST and Luna, are two cryptocurrencies created by the Terra network. Luna acts as a collateral currency to UST.

Stablecoins, as the name suggests, such as terraUSD and luna were promoted as a type of crypto asset that provided better stability during market turbulence.

The value of the UST token is tied to the US dollar, which implies that one UST should always be worth one dollar. The idea was this: If the coin’s value falls below a dollar, it can be ‘burned’ and traded for a dollar of Luna.

Mid-May, the value of 1 UST fell to less than a dollar, plummeting to less than 30 cents for the first time. As the price of UST declined, large Luna holders cashed out, causing the supply of Luna tokens to increase and the price to fall. On May 12th, Luna lost 99 percent of its worth.

The transparency issue

On May 12th, Tether, the largest stablecoin, briefly fell below its par value of $1 per token. Stablecoins like USDC claim to be backed by cash, treasury bonds, and corporate debt, but their lack of clarity and refusal to reveal the specific asset combination create a major transparency issue. The supply of these cryptocurrencies is also independently controlled.

The crypto sell-off has revealed apparent flaws in the market, implying that a sorting process is beginning, with the riskiest elements of the crypto world exposed while others prove more durable.

There is a lot of churning, sifting, and correcting going on in the crypto realm as it goes down. Investors are now doing what they are meant to do, punishing securities with fundamental flaws, or issued by poorly run businesses.

But, for the time being, we can assume that coins with solid foundations will last. And the best path would be to accelerate the process of sorting that is underway.

Users and organisations can be better guarded against ‘weak’ projects if they have more reliable information. Stablecoins, in particular, should be required to reveal their assets, where they are held, and who controls them.

But as investors, what can we do?

Experts recommend keeping your cryptocurrency investments under only 5 per cent of your entire portfolio. As long as your crypto investments do not interfere with other financial goals of yours and you’ve only invested what you’re willing to lose, you’re good to go.