More than $200 billion erased from entire crypto market in a day as sell-off intensifies

Bitcoin fell below $26,000 for the first time in 16 months, amid a broader sell-off in cryptocurrencies that erased more than $200 billion from the entire market in a single day.

The price of bitcoin plunged as low as $25,401.29 on Thursday, according to Coin Metrics. That marks the first time the cryptocurrency has sunk below the $27,000 level since Dec. 26, 2020.

Bitcoin has since pared its losses and was last trading at $28,569.25, down 2.9%.

Ether, the second-biggest digital currency, tanked to as low as $1,704.05 per coin. It's the first time the token has fallen beneath the $2,000 mark since June 2021. Ether was last down 8.8% at a price of $1,937.88.

Investors are fleeing from cryptocurrencies at a time when stock markets have plunged from the highs of the coronavirus pandemic on fears over soaring prices and a deteriorating economic outlook. U.S. inflation data out Wednesday showed prices for goods and services jumping 8.3% in April, higher than expected by analysts and close to the highest level in 40 years.

Also weighing on traders' minds is the downfall of embattled stablecoin protocol Terra. TerraUSD, or UST, is supposed to mirror the value of the dollar. But it plummeted to less than 30 cents Wednesday, shaking investors' confidence in the so-called decentralized finance space.

Stablecoins are like the bank accounts of the barely regulated crypto world. Digital currency investors often turn to them for safety in times of volatility in the markets. But UST, an "algorithmic" stablecoin that's underpinned by code rather than cash held in a reserve, has struggled to maintain a stable value as holders bolted for the exits en masse.

On Thursday, UST was trading at about 41 cents, still well below its intended $1 peg. Luna, another Terra token that has a floating price and is meant to absorb UST price shocks, erased 99% of its value and was last worth just 4 cents.

Investors are scared about the implications for bitcoin. Luna Foundation Guard — a fund set up by Terra creator Do Kwon — had amassed a multibillion-dollar pile of bitcoin to help support UST in times of crisis. The fear is that Luna Foundation Guard sells a large portion of its bitcoin holdings to shore up its ailing stablecoin. That's a risky gamble — not least because bitcoin is itself an incredibly volatile asset.

The fallout from Terra's collapse led to fears of a market contagion. Tether, the world's biggest stablecoin, also dropped below its $1 peg Thursday, at one point sinking to 95 cents. Economists have long feared that tether may not have the required amount of reserves to bolster its dollar peg in the event of mass withdrawals.