Photo by Sajad Nori on Unsplash

A brutal start to the week for the entire cryptocurrency market has brought one of its latest stars to its knees: UST. Just when we thought a decentralized, algorithmic stable coin had finally made the grade and proved all skeptics wrong, it slips 40% below its USD peg. 

At its lowest point on Monday, UST was trading at $0.61 on the dollar thanks to a huge dump of Luna: the token that is used to maintain its peg to the world’s global reserve currency. At the time of writing, UST has recovered to somewhere near $0.90, after some mad scrambling by its founders to shore it up by selling reserves of bitcoin, and Ethereum, and deploying other treasury assets. With Luna down nearly 50% over the last 24 hours though, it’s unlikely this is going to prove a long-term solution if the panic-selling continues. 

More importantly, this underlines how vulnerable decentralized stablecoins that rely on theoretical pegs instead of hard cash are in a good old-fashioned bank run. There is little anybody can do when investors start heading for the door en masse other than joining the stampede and accept a huge loss, or turn their devices off, head to the bar and come back in a few weeks' time. Or indeed, perhaps come back in a few months' time, as there is now little doubt we are in the midst of the most aggressive bear market since 2018. 

Rampant inflation in the global economy should be proving an enormous boon for cryptocurrency, which has always been touted as the answer to the huge inflation many predicted incessant money printing would bring to the US dollar and other developed market currencies.

However, Cryptocurrency continues to move in lockstep with mainstream financial markets in what is becoming a generally risk-off environment. A quick end to the conflict in Eastern Europe looks to be off the table, and there doesn’t seem to be many central banks can do to deal with record-breaking levels of inflation that are making life miserable for average people in the world’s wealthiest markets. Now that the money printer going buuurrr is only going to make the situation worse, investors far and wide are heading for the hills. 

Over the long term, this will prove beneficial for cryptocurrency markets. It is in periods like this that smart, long-term investors buy, and when the most exciting development happens, ready to be deployed when markets begin booming again. Right now though, risk-averse investors should be tempted to stick to liquid strategies in stablecoins that have proven themselves over long periods and passed verifiable and credible audits. The world is not yet ready for fully decentralized, algorithmic stable coins.