The Dramatic Crash Of Terra (Luna) Has Wreaked Havoc
The Terra (LUNA) crypto token crashed from $120 to $0.02, a 99.9% correction, of which 99% was within 48 hours of a black swan event on May 11th – 12th. The dramatic crash of Terra (Luna) has wreaked havoc in the lives of investors who are feared they will become homeless after the crypto mayhem. The reasons for the LUNA crash are deeper though, and are a warning on crypto price volatility.
Technically Terra is the name of the crypto asset, and LUNA is its ticker symbol. More people still refer to the LUNA crash rather than the Terra crash however, so as not to confuse it with stablecoin TerraUSD, ticker UST. Although UST crashed too, despite being a stablecoin. Both Terra (LUNA) and TerraUSD (UST) were created by Terraform Labs, founded in 2018 and located in Seoul, South Korea. At the centre of the story is Terra Labs CEO Do Kwon.
Terra Luna (UST) ranked amongst the 10 most valuable cryptocurrencies until this week, with each token worth roughly $85 (£69.69) on May 5. On May 11, it was already in a precarious position, having dropped down to $17.38 (£14.25) in the early hours. Just a day later, on May 12, the coin forfeited 97.54 percent of its value, dropping down to its current value of $0.02863 (£0.023). The sudden and dramatic fall from grace ravaged the coin's market cap, taking it from more than $40 billion (£32.7 billion) to just $500 million (£409 million). Some investors said they had lost up to $450,000 (£368,000), spelling disaster for their homes and savings.
Why UST lost its peg, no one knows, and Do Kwon hasn’t given an explanation to investors and the public. One rumour is that this was a co-ordinated attack in order to exploit Terra and cause a Bitcoin crash, so that ‘whales’ would be able to buy in at a cheap level. Some believe that Luna crashed because of the UST (Terra USD), which is an algorithmic stablecoin, de-pegging fiasco.
The recent incident of UST losing its dollar peg has sent shockwaves across the crypto market as it has exposed the weakness of algorithm backed stable coins. During the larger liquidations due to the macro-market volatility, UST fell down to as low as $0.60 which sparked a major sell-off in LUNA and resulted in one of the biggest price crashes in LUNA’s history. Luna Guard Foundation (LGF) scrambled to support UST by liquidating large Bitcoin wallets for sustaining UST’s value. This phase of instability in LUNA will remain because the overall crypto market is expected to remain choppy in the coming weeks.
The Coinbase outage came as Binance, the world's largest cryptocurrency exchange, suspended trading of Terraform Labs' Terra (Luna) and TerraUSD (UST) tokens, which crashed 98 per cent, wiping out the life savings of its investors. On Thursday, over $275 billion were wiped off from global crypto market cap within 24 hours and Bitcoin dropped to nearly $27,000, a level it saw in December 2020. The world's second largest cryptocurrency Ethereum has joined the cryptocurrency crash, plummeting in value by 20 per cent, as the digital currency downturn hammers investors who bought during the Covid years.
Do Kwon addressed the situation via social media. He told investors that he was "close to announcing a recovery plan" and asked his followers to "hang tight". In a following Twitter thread, he praised the Terra ecosystem, and vowed that the currency's "return to form" would be a "sight to behold". The activity in Terra was felt across the market, as other currencies are also trending down at present. But cryptocurrency experts have said the "extreme volatility" of the last 24 hours was a result of technological nascence.
For investors who may not be aware of Terra's model as an algorithmic stablecoin, LUNA tokens act as the reserve currency supporting the network's UST token. Besides some Bitcoin and other digital assets backing this stablecoin, Terra maintains its peg by minting and burning its native token, LUNA. In other words, the stability of UST depends a great deal on the stability of LUNA. However, with a rapid decline in the price of LUNA, UST has fallen off its peg. While UST has clawed back much of its losses, now around $0.93 per token, it previously fell as low as $0.6841, signaling some serious trouble and concerns about a potential collapse for this key stablecoin. The stablecoin market is very important to the proper functioning of many aspects of the crypto market. If investors lose faith in the underlying value of stablecoins, the potential for market contagion to take hold is real. Thus, many investors are watching how Terra's LUNA and UST tokens perform in this volatile environment.
Moving forward, there's increased uncertainty with respect to how the market will regain its trust in UST and other stablecoins amid this impressive sell-off. It's worth noting that UST has lost its peg in the past and regained it. However, this dramatic dip in the price of UST may shake the faith of investors in Terra for some time. How much damage is permanent versus temporary remains to be seen. However, until UST regains its peg again, these discussions are likely to continue.