The death spiral commenced. The more UST fell, the more LUNA had to be minted, creating hyperinflation in the sister token and causing it to collapse. Activity on the Terra blockchain was suspended twice as the token value was so low as to pose a security risk. Almost exactly a month after hitting a record $119, Luna traded at near zero with UST at around $0.20. Both UST and LUNA had been top ten coins within the ecosystem and over $40 bn dollars were wiped out.

This was a major contributing factor to crypto crash with coins like Bitcoin losing 20% as participants speculated the Luna Foundation would dump its BTC reserve to defend the peg. Tether, which has a centralized reserve-backed stablecoin model, dropped to 97 cents, losing its parity with the U.S. dollar as concerns resurfaced around the quality of its reserves. On Coinbase, it fell as low as 96 cents. 

Once crypto markets stabilized, the wreckage could be examined but the post-mortem will continue for years to come. Around $300bn was wiped off the total market value in less than a week, no doubt triggered by the volatility and risk-off environment we are seeing in traditional markets. 

Markets across the board have been in meltdown for weeks, with investments in the likes of Peloton, Robinhood and Coinbase falling 91%, 89% and 77% respectively from their peaks. The Nasdaq Composite fell to its lowest level since November 2020, falling by more than 3%.

It is very likely that volatility will continue as the Fed maintains its tightening policy. Officials have communicated that they are more concerned with inflation than growth and the markets will have to bear the pain. When volatility is this high, assets tend to have high correlations, and digital ones are no exception, with those that are deemed highly speculative most likely to fail. 

The meltdown of the crypto markets represented two key opportunities though. The first is the opportunity for institutions to start building positions in the digital assets space once it is cleared of the froth resulting from unprecedented monetary and fiscal expansion. The second is the chance for regulators to take stablecoins seriously. 

For traditional institutions, falling prices will represent an opportunity to dip their toes at a more attractive level if they missed the previous cycles. The market also demonstrated its volatility, something traders may be particularly interested in. While we can't call the bottom and correlations among asset classes remain elevated, Bitcoin has survived corrections of 70-80% in the past.

The events that unfolded in May are a reminder that crypto remains an evolving area, with high risks, that was a beneficiary of what some call the “liquidity lottery”, but also a breeding ground for innovation that should result in a more robust ecosystem.