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LUNA (Terra) plummets 85% and UST tumbles: Implications for Bitcoin

By Noemi Jansana / Alejandra Zamora

Date: Wednesday 11 May 2022

LUNA (Terra) plummets 85% and UST tumbles: Implications for Bitcoin

(Sharecast News) - A 70% or 85% plunge in an asset, in 24 hours, is something that even we veterans of the cryptocurrency market have not seen on too many occasions. For digital currencies there is no shortage of stories of tokens turning to ashes overnight, but when it happens with a 'crypto' from one of the most talked about projects in the last year and which has also launched a stable coin, it is an event that shakes all markets and puts investors on their guard.
This is LUNA´s case, the 'crypto' of the Terra blockchain, that has seen 85% of its value evaporate since Tuesday (95% in the last week) and is in free fall and without brakes, trading around $5. It has also lost positions in the ranking of 'cryptos' and now occupies the thirty-ninth place. On April 28th, about two weeks ago, it was trading above $90 and its all-time high, reached on April 5th, just over a month ago (!!!) was almost $120.

Cryptocurrency traders are nervous about the peg of the Terra dollar (UST) as well - the other 'crypto' associated with the project - to the dollar, as it plummeted below $0.70 on Tuesday and has continued to fall on Wednesday to $0.35. Despite the sharp swings and brutal volatility, it is looking to stabilize around $0.5-$0.4. "Basically, stable coins, which are supposed to be fully backed with an equal amount of mandate, are back in the spotlight, and traders continue to show their anxiety about it," explained Naeem Aslam, analyst at Avatrade.

Terra, through the Luna Foundation Guard (LFG) - that´s responsible for backing the UST - has been buying Bitcoins in recent months raising its holdings well above Tesla's, as it already amassed $3 billion in the 'crypto'. The market believes it may have sold a large amount of its holdings to save the stablecoin's peg to the U.S. dollar, specifically $1.5 billion of them, so, half. "Remember, this is not the first time we have seen stable currencies lose their value against the 1:1 exchange rate dollar, so overall, if Terra can prove it can contain the recent pullback, it would only strengthen the stable currency market," Aslam commented.

All this chaos is keeping investors very nervous, as they fear that another massive sell-off in the LFG Bitcoin pantry will still add more complications to Bitcoin, as it has tested the $30,000 level on Monday and returns to declines to the vicinity of this price. This also opens the door to further flight of funds and the queen of digital currencies to fall to $28,000 or $25,000, according to some predictions. The UST case puts the regulatory spotlight back on stable coins as well, with the US Federal Reserve (Fed) and the US Treasury bidding for regulation on these cryptos, as they fear their implications on the global financial system, stemming from their link to the dollar.

Global cryptocurrency exchange Binance also announced on Tuesday that it suspended withdrawals for Terra's LUNA and its sister token, UST. Binance stated early Tuesday that it halted withdrawals for UST and LUNA for approximately six hours "due to a high volume of pending refund transactions," adding that "this is caused by network slowness and congestion."

Given how closely UST and LUNA are intertwined with the mint and burn mechanism on the blockchain, it is not surprising that the 'stablecoin' losing its peg to the dollar has had a ripple effect. Every time the price of UST exceeds its dollar parity, Terra holders can burn $1 of LUNA to mint $1 UST. Similarly, if the price of UST falls below $1, users can burn it to mint $1 of LUNA. This ensures that shrewd traders can make some profit from arbitrage, while destroying UST and theoretically creating more buying pressure for the decentralized 'stablecoin'.

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