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Cryptocurrency Markets Have Gone Amok, Again

Cryptocurrency Markets Have Gone Amok, Again

Seasoned cryptocurrency traders are, perhaps, no stranger to the excessive volatility that comes with the territory. But events in cryptoland sometimes seem to push their limits. For instance, back in January, a lesser-known crypto coin known as Dogecoin rallied more than 800% in the space of a month after Tesla Inc.’s (NASDAQ:TSLA) CEO Elon Musk, through a series of cryptic tweets, encouraged his followers to "hodl" DOGE.

And now cryptoland is at it, again.

A week ago, Singapore-based Terraform Labs' native digital token Terra soared 50% in the space of a week after 100M Terra tokens got burned, effectively removing them from coin supply forever, as Alpha Impact CEO Hayden Hughes told Bloomberg.

"This reduction in supply combined with the popularity of Luna staking (where staking participants get new tokens) has created a supply shock that has driven up the value." 

Terra has gained more than 10,000% in the year-to-date,and now boasts a market cap of $60.4B, up from less than $200M in the same year-ago period, making it the tenth largest crypto, according to data from CoinMarketCap. Terra remains highly volatile, up nearly 13% in intra-day  trading on Wednesday to change hands at $70.67 per token.

Meme-Based Cryptocurrencies

Terraform's dispute with the U.S. Securities and Exchange Commission(SEC) regarding its platform potentially selling unregistered securities has not stopped it from becoming "the latest shiny thing in the crypto space, following in the footsteps of other blockchains like Solana and Avalanche, all which have witnessed explosive gains in the past year," Nexo Co-founder Antoni Trenchev has told Bloomberg.

Never mind the fact that Terra’s protocol deploys algorithmic stablecoins, which essentially means that "Luna's price dynamics are mostly a function of the demand for UST, and by extension, the demand for using UST across various applications and blockchains," as Terraform’s Labs Head of Communications Brian Curran earlier told Bloomberg. 

Stablecoins are a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. For instance, Tether (USDTUSD) and TrueUSD (TUSDUSD) are popular stablecoins that have a value equivalent to that of a single U.S. dollar and are backed by dollar deposits. You don’t expect either coin to move 800% in 30 days.

Terra is not alone here: recall towards the end of October, Ethereum faced a similar reduction to its token supply, causing its price to rise.

If you are wondering what’s going on here, look no further than the newly  created class of the so-called ‘meme stocks,’ with GameStop Inc. (NYSE:GME) and AMC Entertainment (NYSE:AMC) being the top candidates.

Back in January, long-standing subreddit channel  r/WallStBets started a wave of buying heavily-shorted GME shares, creating a massive short squeeze and sending the shares unfathomable 1,500% higher in a matter of weeks. The group then focussed its attention on AMC with the same spectacular results before quickly picking out other targets. The buying pressure was so high that popular trading app Robinhood banned trading in meme stocks such as Koss Corp. (NASDAQ:KOSS), Sundial Growers Inc. (NASDAQ:SNDL), Trivago Inc. (NASDAQ:TRVG) and Naked Brand Group.

Meme stocks are frequently low-priced, highly shorted stocks which investors believe are unfairly being targeted by hedge funds to depress their prices. Indeed, the New York Stock Exchange has warned that pricing mechanisms for meme stocks may be distorted because a big share of their trades are executed away from conventional public exchanges where share price formation occurs.

At the moment, the SEC and the markets appear helpless to a bunch of marauding investors who can pump a stock just because they can, meaning meme stock frenzies might be here to stay. Retail investors can often be left holding the bag after the frenzy dies out because meme stocks differ from ordinary investments because their price movements depend heavily on viral buzz or community interest, rather than business fundamentals.

The same thing has been happening in cryptoland, with meme-based alt coins rallying as more tokens are removed from ETH circulation.

Specifically, Shiba Inu burnt 770.12 ETH around the same time Terra rallied, becoming the third largest ETH burner; Uniswap V2 destroyed 2,729.22 ETH and Tether burnt 1,248.72 ETH around the same time period. CoinDesk notes that ETH may continue outpacing BTC as the ether-bitcoin implied volatility spread rises.

In addition, SafeMoon--created on the Binance Smart Chain blockchain--is another alt coin that has been seeing some wild price action recently.

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