Why Terra Luna Cryptocurrency Crashed?
Terra (LUNA) cryptocurrency investors are panicking after the coin’s value dropped more than 98% in 24 hours.
Terra, once in the top ten most valuable cryptocurrencies, fell below $1 (£0.82) on Wednesday after peaking at $120 (£98.60) last month.
The sudden collapse caused the market cap to plummet from nearly $40bn (£32.9bn) to just $500m (£411m), resulting in catastrophic losses.
Why has its value fallen so drastically and will it ever recover?
Here’s everything you need to know about it.
What is Terra Cryptocurrency?
Terra is a cryptocurrency based in South Korea.
It was founded in January 2018 by Daniel Shin and Do Kwon of Terraform Labs, and according to the cryptocurrency website CoinMarketCap, Terra is “a price-stable cryptocurrency targeting mass adoption” in South Korea.
“Their mission is to free people from the hidden fees built into everyday international payments,” explains this Medium post. “Their goal is to eliminate inefficiencies by using blockchain technology to ensure stability and adoption by e-commerce platforms.”
It’s basically a cryptocurrency made up of two halves: the ‘stable coin’ Terra and Luna, a much more ‘traditional’ cryptocurrency.
Terra is designed to always be worth the United States Dollars (USD) in real money, and although Luna’s price fluctuates with the market, a Terra always gives you $1 Luna and $1 Luna with a Terra.
This means if Terra trades for more than $1, traders can purchase $1 worth of Luna and trade it for more than $1 worth of Terra = profit.
If terra is trading for less than a dollar, people can buy a terra and trade it for 1 dollar luna = profit.
In theory, this means that if a coin’s value plummets, investors will simply swap their holdings for the other half of the coin, making quick bucks and fighting to restore the crypto asset’s price.
It is a self-regulating mechanism that cannot fail. could he?
Why Terra Luna Cryptocurrency Crashed?
Terra’s decline comes amid a broader crypto market downturn, with Bitcoin down more than 50% from its all-time high of nearly $69,000 (£56,677) in November 2021.
In the wake of the recession, major cryptocurrency exchange Binance briefly banned all withdrawals from the Terra Network and even blocked those trying to sell.
But Luna’s downfall was compounded by issues with Terra’s dollar-pegged stable coin UST.
What is a Stablecoin?
Stablecoins are cryptocurrencies whose value is often tied to a physical asset, such as a coin. B. a “real” currency or traded commodities such as precious or industrial metals.
Because they are stabilized by assets that fluctuate outside of the highly fluid cryptocurrency space, they are less volatile than other cryptocurrencies.
Because the price of bitcoin and other cryptocurrencies are highly interconnected, cryptocurrency holders cannot avoid large price declines without abandoning the market entirely or investing in asset-backed stablecoins.
Because a stablecoin’s value is typically tied to a real-world asset, it is unlikely to fall below the value of those underlying physical commodities.
Theoretically, holders of these coins can also have their cryptocurrencies paid out for real equivalence at any time.
It’s not always that simple, however, and some stablecoins like Tether, the largest by market cap, have been criticized for not being able to conduct audits of the physical reserves of wealth they are supposed to hold.
What Do You Mean By UST?
Technically, Terra itself is not a stablecoin, but it is ‘pegged’ to one at UST.
Because the UST is pegged to the value of the US dollar, its price, and therefore Terra’s, was considered much safer.
UST is a little different from traditional stablecoins. It’s an “algorithmic stablecoin,” meaning it has no physical reserves and instead uses a complicated system of “smart contracts” to keep the value as close to $1 as possible.
However, UST broke away from the dollar earlier this week, with the former stablecoin falling in value to $0.29.
Things have gotten so bad that many investors believe the UST project will never recover; After the crash, investors rushed to liquidate their positions (in both Terra and Luna) faster than the currency’s automatic stabilizers could step in.
This caused the sophisticated algorithmic mechanism that was supposed to keep Terra’s trade at a fixed price to fail, rendering both sides nearly worthless.
Will Terra LUNA Recover or Not?
The Luna Foundation Guard, which acts as the custodian of the UST, currently intends to fund more than $1 billion to revitalize the stablecoin.
Do Kwon, who founded the creators of Terra, Terraform Labs, tweeted on Tuesday, May 10th, “Right before the announcement of the $UST stimulus package. Just.”
On Wednesday, May 11, he followed up with a Twitter thread asking the community for patience.
“I understand that the last 72 hours have been extremely difficult for all of you,” he said. “Know that I am committed to working with each and every one of you to get through this crisis and we will get through this.”
“Terra’s ecosystem is one of the most vibrant in the crypto space, with hundreds of passionate teams building category-defining applications within it… Terra’s return will be a sight to behold.”
But for now, it’s probably best not to invest in the ailing cryptocurrency.
Considered a promising breakthrough in crypto funding, Terra even used its reserves to buy a large stake in Bitcoin due to its success.
But if Terra can suffer such a drastic drop in value, what’s stopping other similar coins from doing the same?
Could Tether, the largest stablecoin, follow in their footsteps? And what happens then?