Could the next crypto collapse flow through to ASX shares?

The LUNA token, meant to keep UST pegged to the US dollar, just crashed more than 99%.

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Key points

  • ASX shares look to have shrugged off the collapse of several leading cryptos
  • With greater institutional investments, the risk of contagion to share markets from crypto crashes increases
  • At 19 US cents today, UST remains well off its US$1 peg today

ASX shares sold off yesterday, with the All Ordinaries Index (ASX: XAO) closing down 1.8%.

That came on the same day Aussie investors awoke to news of a major crypto collapse, as TerraUSD (CRYPTO: UST) – intended to be pegged to the US dollar – plunged to 30 US cents.

But the sell-off in ASX shares was caused more by the previous day’s heavy losses in US markets, along with persistent investor concerns over rising interest rates and a possible slowdown in global growth, than the crypto rout.

What’s happening with UST

As the Motley Fool reported here yesterday, crypto markets ultimately rely on investor confidence. And investor confidence in UST and Terra (CRYPTO: LUNA) – the token that’s meant to keep UST pegged right at US$1 – evaporated over the past days.

Some stablecoins are backed by fiat currencies or other crypto holdings.

Terra had several billion dollars’ worth of Bitcoin (CRYPTO: BTC) – the price varies depending on the date you value the Bitcoin – in reserve, which it’s been selling to try to support its UST dollar peg.

But the crypto was also largely reliant on LUNA to hold that peg, enabling crypto investors holding UST to swap it for US$1 worth of LUNA at any stage.

Clearly, though, none of these measures was enough.

At the time of writing, CoinMarketCap tells us that UST is down 76% over the past 24 hours, trading for 19.6 US cents. A long way from it US$1 peg.

As for LUNA, it’s gone close to zero, down 99.3% over the past 24 hours to 0.57 US cents.

Commenting on the carnage, Michael Gronager, CEO of crypto data analysis firm Chainalysis, said (courtesy of The Australian Financial Review):

What the crypto industry is learning right now is, what is enough? How much backing do you actually need to support the stablecoin? All of these projects start on a sunny day when everything works, but when the storm comes, they might break, and we find out whether they invested enough in that problem.

Could the next crypto collapse flow through to ASX shares?

ASX shares don’t appear to have been directly impacted by the crypto crash.

But next time we might not be so fortunate.

According to Gronager (quoted by the AFR):

My assessment is this won’t flow through to traditional markets this time round, but probably will next time.

Now it’s isolated to a relatively small number of people, but the more you tie up an asset class that is not protected, not well understood and doesn’t have the right transparency, then of course there’s more risk, and of course it will flow through.

Chainalysis’ own data shows a large uptick in institutional money going into crypto and DeFi projects.

“You could call that a win for crypto, but at the same time it creates another destabilising factor in markets,” Gronager said.

But, he added, “This will have compounding effects that could cause other things to happen, ideally not tomorrow, but let’s see.”

For now, ASX shares have shrugged off any concerns in the collapse of what was one of the world’s biggest cryptos by market cap. At the time of writing, the All Ords is up 1.75%.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin and Terra. The Motley Fool Australia has positions in and has recommended Bitcoin and Terra. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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