Cryptocurrencies Crater As Terra Collapse Triggers DeFi Exodus

Cryptocurrencies underpinning some of the most popular decentralized finance protocols tumbled as the collapse of the TerraUSD stablecoin triggers a stampede out of many of the digital-asset market’s most popular tokens.

DeFi favorite Avalanche plunged about 30%, while Solana slumped more than 20% and Aave fell 24%. Bitcoin fared better, and was down about 3.7% after tumbling to an almost 11-month low of less than $30,000. The TerraUSD stablecoin continued its downward spiral.

“UST’s collapse undercuts confidence in all liquidity protocols,” said Aaron Brown, a crypto investor who writes for Bloomberg Opinion. “If UST can fail, maybe Aave can too. Sort of like when Bear Stearns failed, it focused people’s attention on whether Lehman would fail.”

The TerraUSD algorithmic stablecoin continued to spiral lower, bouncing between 20 and 90 cents. Backers of the coin are trying to raise about $1.5 billion to shore up the token after it crashed from its dollar peg, according to the founder of a firm that was approached about the deal.

“Is the market getting spooked by what’s happening with Terra? The answer is yes,” Craig W. Johnson, chief market technician at Piper Sandler, said by phone. “Money-market funds are important to investors and right now we’re questioning the third-largest money-market fund in crypto land. People did not think we were going to break the buck on that and that’s clearly happened.”  

Terra’s troubles have been the dominant story in finance all week. “The breaking of an inadequately robust or collateralized protocol is destroying value,” said Hugo Rogers, chief investment officer at Deltec Bank & Trust. “And this is having knock-on effects.”

Sentiment was also crushed after data showed US consumer prices rose by more than forecast in April, indicating inflation will persist at elevated levels for longer. The data point also suggests the Federal Reserve will stay on its path of aggressive interest-rate hikes, creating an unfavorable environment for cryptos and other risk assets.

“There is extreme fear across the crypto market,” said Marcus Sotiriou, an analyst at the UK-based digital-asset broker GlobalBlock.

Cryptocurrencies and other riskier assets have been under pressure all year. The Fed and other central banks are raising interest rates to fight red-hot inflation, creating an unfavorable environment for risk assets.

Bitcoin on Wednesday afternoon in New York was trading around $29,700. The area around $30,000 had been an “especially sensitive zone,” for Bitcoin, wrote James Malcolm, head of foreign exchange and crypto research at UBS. That’s where mining economics turn negative, “ which could potentially lead to increased coin sales by this key cohort,” he said. He added that long-term accumulators like MicroStrategy Inc. begin to fall below historical breakevens.