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The U.S. Federal Reserve’s interest rate hikes and quantitative tightening have triggered a massive reallocation of global capital, strengthening the U.S. dollar while weakening the Japanese yen. U.S. Treasuries have been heavily sold off, leading to a crypto market crash where cryptocurrencies once dubbed the “hedge currencies” are now seen as moving in tandem with the Nasdaq. Bitcoin prices have plummeted. Ironically, even the stablecoin TerraUSD (UST) collapsed, falling far below its $1 peg and stoking market panic.

Algorithm Stabilizes Coin Price

UST is the world’s top third stablecoin. Unlike Tether (USDT) and USD Coin (USDC), it relies on an algorithm to stabilize its price without support of physical reserves. Terra’s algorithm uses a two-token model. Through the algorithm linked with its sister token LUNA, UST’s supply is adjusted to stabilize its price. 1 USD of LUNA can be burned to mint 1 UST, while 1 UST can also redeem 1 USD of LUNA to maintain its stability.

In early May, $2 billion worth of UST deposits were withdrawn, triggering the selloffs. Each UST plunged to just 0.9857 USDT. Exchanges like Binance then temporarily suspended LUNA deposits or delayed crediting them. Fearing UST de-pegging risks, investors rushed to exit, causing a huge UST-USD divergence. LUNA prices then crashed, with panic selling of both UST and LUNA. LUNA fell as much as 95% to nearly zero.

NFTs and Virtual Land Values Similarly Affected

Victims worldwide have accused Terra of being a “crypto scam”. Cryptocurrencies have always been high-risk investments with incredible volatility. Though many coins’ prices have quickly rebounded, many investors have unavoidably been “shaken out”. NFTs and virtual land values that typically transact in ETH have also been affected, with CryptoPunks dropping 21% and the secondary market prices of Bored Ape Yacht Club (BAYC) falling from over 150 ETH (US$429,000) to 86 ETH ($194,000).

Don’t Conflate Cryptocurrencies with the Metaverse

The metaverse is often conflated with cryptocurrencies and NFTs, though they are all products of the times. The metaverse represents an inevitable technological evolution with cross-industry applications, even in gaming through immersive technologies that create near-real environments for virtual property viewings, concerts watching, video conferencing, shopping and more. The volatility in cryptocurrency market will not negatively impact its development. Recently battered high-growth tech stocks have forced investors to step back, but ETFs capturing the metaverse-related stocks allow investors to compare their components and consider buying on dips.

Learn more: https://www.nikkoam.com.hk/etf