Bitcoin dropped below $26,500 Thursday morning (May 12), giving up all its 2021 gains in the wake of a market-wide collapse that saw nearly all the top 100 cryptocurrencies drop 20% to 35% overnight.
While the crypto market has recovered somewhat, there was still a sea of red, with many tokens still down 5% to 15%.
The broad price collapse was triggered by the de-pegging of stablecoin TerraUSD (UST), which pivoted between $0.03 and $0.83 over the previous 24 hours.
Read more: Tether Breaks Buck as Stablecoin Panic Spreads
That, in turn, collapsed the price of algorithmic stablecoin UST’s partner token, terra, or LUNA, which is used in the automated arbitrage mechanism that was supposed to maintain UST’s dollar peg.
LUNA started the month above $80 and is now approaching $0.01, having wiped out nearly all of its $29 billion market capitalization.
The No. 2 cryptocurrency, ether (ETH), tumbled well below $2,000 overnight, falling below $1,750 at one point. Like bitcoin, it has recovered somewhat, at $1,990.
Interestingly, one of the top payments-focused cryptocurrencies, bitcoin cash, was up almost 7% by noon, having climbed above $220 after dumping from $210 to $160 overnight. That made it one of very, very few cryptocurrencies in the green.
Corporate Pain, Opportunities
Crypto-related stocks did not have a good morning either, with Coinbase, already pummeled by its dismal Tuesday (May 10) quarterly earnings report, dipping 56% in five days. It started the year at $250.
See more: Coinbase May Be Unfazed by 80% Drop But Investors Are Clearly Shaken
Not everyone was discouraged. Cathy Wood’s Ark Invest doubled down on Coinbase, snapping up almost 550,000 shares on top of the $7.2 million worth she bought after the earnings report led to what she called a buying opportunity.
Several high-profile corporate bitcoin investors fared poorly, with Elon Musk’s Tesla bitcoin cache now worth about $1.2 billion, down 10%, and Michael Saylor’s Microstrategy down about 8%, or $300 million.
The broader stock markets were also down, although there were other issues like inflation still running hot and a slew of poor earnings reports.
Nonetheless, UBS Director of Floor Operations Art Cashin told CNBC he believes some of the market’s weakness was caused by cryptocurrency’s woes.
“I think we have a new thing to look at here,” Cashin said. “I think traders are going to have to watch any sudden weakness in the cryptocurrencies. We’ll have people recoil and get very defensive in here. So, we want to be careful.”
That spillover effect from crypto to the broader markets is something regulators have been warning of, and fearing, for some time.
Treasury Secretary Janet Yellen referred to it Tuesday, when she told a Senate Banking Committee hearing that crypto is “a rapidly growing product and that there are risks to financial stability.”
Read more: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos
The Financial Stability Board said that in more detail in February, when it warned governments around the world to move faster on cryptocurrency regulation.
The international regulatory body said, “Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.”
See more: FSB Sounds the Alarm of Crypto Assets’ Growing Threats
Stablecoins were a big part of the problem, FSB added, noting that their outstanding dollar-peg reserve assets — then around $180 billion — “are equivalent to almost 20% of the total size of U.S. assets held in institutional and retail prime money market funds.”
Read more: FSB Tells National Regulators to Move Faster on Stablecoin Regulation