The price of Luna, the sister cryptocurrency of stablecoin TerraUSD, fell to $0 on Friday, erasing the fortunes of many cryptocurrency investors. This is according to data obtained from CoinGecko. This marks a stunning collapse of a cryptocurrency that was once more than $100.
TerraUSD, also UST, has been in the spotlight in the last few days after the stablecoin, which is supposed to be pegged 1:1 with the U.S dollar, dropped below the $1 mark.
UST is an algorithmic stablecoin that uses code to keep its price at around $1 depending on a complex system of burning and minting. To create a UST token, some of the related cryptocurrency luna is destroyed to maintain the dollar peg.
Unlike competitor stablecoins USD Coin and Tether, UST doesn’t have the backing of any real-world assets like bonds. Instead, the Luna Foundation Guard, which is a nonprofit founded by Do Kwon, Terra’s founder, is holding Bitcoin worth $3.5 billion in reserve.
However, when the crypto market becomes volatile, like this week, UST is tested.
According to data obtained from Coin Metrics, the price of luna cryptocurrency dropped from around $85 a week ago to about 4 cents on Thursday, and then to $0 on Friday, making the coin worthless. Last month, the crypto had hit a peak of almost $120.
On Thursday, the Binance cryptocurrency exchange announced that Terra network, the blockchain powering the luna token, is “experiencing slowness and congestion.” Binance stated that due to this, there is a “high volume of pending Terra network withdrawal transactions” on the exchange, which is a clear sign that cryptocurrency traders are in hurry to sell luna. UST has lost its peg and cryptocurrency investors are now about to dump its related luna token.
Binance decided to suspend luna withdrawals for a few hours on Thursday as a result of the congestion, but they later resumed. Terra also announced that it will resume the verification of new transactions on the blockchain, but it will not allow direct transfer on the network. Users are encouraged to use other channels to do the transfer.
The TerraUSD crash has spread contagion across the cryptocurrency industry. The reason is that the Luna Foundation Guard is holding Bitcoin in reserve. There are fears among cryptocurrency investors that the foundation may decide to sell off its Bitcoin holdings to support the peg. This comes at a time when the price of Bitcoin has slipped by over 45%.
Tether, the biggest stablecoin in the world, also fell below its $1 peg on Thursday at a time when there is widespread panic in the cryptocurrency market. However, it regained its $1 peg hours later.
On Thursday, Bitcoin fell below $26,000 at one point, which is the lowest level it has reached since Dec. 2020. However, it made a rebound on Friday, rising above $30,000 regardless of the woes surrounding the stablecoin TerraUSD. Probably, cryptocurrency traders took comfort after tether regained its $1 peg.
On top of the Luna saga, cryptocurrency markets have also been hit by other headwinds including high inflation and interest rates, which have also caused a massive sell-off in the global stock markets. Crypto price movements have been related to stock price movements.
“The Luna/UST situation has hit market confidence quite badly. Overall most cryptocurrencies are down [more than] 50%. Combining this with global inflation and growth fears, does not bode well in general for crypto,” said Vijay Ayyar, the vice president of corporate development and international at Luno crypto exchange.
The Bitcoin rebound may also not be sustainable.
“In such markets, it’s normal to see bounces amounting to 10-30%. These are normally bear market bounces, testing previous support levels as resistance,” Ayyar added.