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  • Writer's pictureBy The Financial District

Bitcoin Tries To Bounce Back As Crypto Market Sinks

Cryptocurrencies nursed large losses on Friday, May 13, 2022, with bitcoin trading near $30,000 and set for a record losing streak as the collapse of TerraUSD, a so-called stablecoin, rippled through markets.

Photo Insert: Crypto assets have also been swept up in broad selling of risky investments on worries about high inflation and rising interest rates.

Crypto assets have also been swept up in broad selling of risky investments on worries about high inflation and rising interest rates. Sentiment is particularly fragile, as tokens supposed to be pegged to the dollar have faltered, Alun John and Tom

Bitcoin, the largest cryptocurrency by total market value, managed to bounce in the Asia session and traded at $30,300 at 0623 GMT (2:23 pm in Manila), up 5%. It has staged something of a recovery from a 16-month low of around $25,400 reached on Thursday.

But it remains far below week-ago levels of around $40,000 and, unless there is a rebound in weekend trade, is headed for a record seventh consecutive weekly loss. "I don't think the worst is over," said Scottie Siu, investment director of Axion Global Asset Management, a Hong Kong-based firm that runs a crypto index fund.

"I think there is more downside in the coming days. I think what we need to see is the open interest collapse a lot more, so the speculators are really out of it, and that's when I think the market will stabilize."

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TerraUSD (USDT) broke its 1:1 peg to the dollar this week, as its mechanism for remaining stable, using another digital token, failed under selling pressure. It last traded near 10 cents.

Tether, the biggest stablecoin and one whose developers say is backed by dollar assets, has also come under pressure and fell to 95 cents on Thursday, according to CoinMarketCap data, but was back at one dollar on Friday.

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The share price of the leading crypto-industry stock, Coinbase, an exchange, is half what it was a week ago, falling 26% in a single day after it reported earnings and disclosed that users’ deposits on its platform were not necessarily protected in the event that the firm went bust.

The sell-off comes at the same time as tech stocks, high-yield bonds and other risky assets have swooned as the Federal Reserve has begun raising interest rates, The Economist also reported.

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Most stablecoins are tightly pegged to a traditional fiat currency, such as the US dollar, or to a commodity like gold. But algorithmic stablecoins aren't necessarily backed by any real external asset, relying on complex financial engineering to hold their value steady.

And when they fall, they tend to fall hard — industry watchers call this a death spiral, David Goldman and Allison Morrow reported for CNN Business.

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Algorithmic coins are "just a fancy way of saying, 'We are going to say that this is worth a dollar because it's backed by another asset that we also create out of thin air,'" says Charles Cascarilla, the chief executive and co-founder of Paxos, a blockchain infrastructure firm.

In the case of TerraUSD, that other "out of thin air" asset is the cryptocurrency Luna. An investor can, in theory, exchange one Terra for a dollar's worth of Luna, its sister token whose price isn't fixed.

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