It is a very powerful and very brutal expiration that the cryptocurrency market has been inviting us to follow for the past three days. Alongside Bitcoin and Ethereum falling more than 20% each, the impossible happened to the stablecoin TerraUSD (UST), falling off its dollar tracking on Monday night.
As a consequence of this unprecedented episode, the price of Luna, a top 10 cryptocurrency in the world, fell from $80 at the start of the month to less than $0.18 this morning (05/12/22 at 11:45 a.m.). The losses are almost total for investors who have bought the crypto in recent months. Relayed in 63rd position of cryptocurrencies in terms of capitalization, Luna is dangerously close to zero dollars. One of the biggest cryptocurrency crashes to date.
Last night, a final bounce occurred, creating a surge over 400% of Luna’s price. But this one didn’t last long and the groundless speculation soon died down. The Luna foundation, behind the Terra blockchain and its various tokens, had sent a bottle overboard asking investors to help it recapitalize its tokens. A lifeline that was not enough. The height of the unthinkable: the UST stablecoin now costs more than the Luna token.
Why such a drop?
To understand the fall of Luna, we must understand that of the UST. As we noted in an article published on Tuesday about its fall, it is an algorithmic stablecoin, which does not rely on a reserve of the fiat currency on which it runs its course, placed in a bank . The TerraUSD is based on an arbitration mechanism, the operation of which is based on the Luna cryptocurrency (from the same Terra blockchain). To put it simply: when the price of a UST goes below a dollar, the exchange mechanism burns a UST against a dollar of Luna.
Consequently, Luna’s price slipped into bearish pressure, and the sudden arrival of extraordinary volume sent the mechanism spinning. The cryptocurrency entered a spiral where investors withdrew en masse (we are talking about 40 billion dollars evaporated) and where the price continued to fall without any support or psychological threshold. Opposite, investors are also withdrawing from the UST – which had lost what characterized it: the stability of its course.
What caused the crash will be a very big deal. We will try to come back to this lemon squeezer as soon as possible. But one thing is certain: faced with the indebtedness of thousands of individuals around the world, some have most certainly enriched themselves to the tune of billions. Do Kwon, the developer behind the Terra blockchain (who claimed to want to “kill” competing stablecoins like DAI) could be under investigation.
Consequences in France
In recent months, UST has climbed the rankings of the most popular stablecoins and was ranked third until this week. Its success is due in particular to staking platforms including Anchor (52% of UST reserves), based on the Terra blockchain. With it, investors could deposit a sum of their stablecoins on an investment at 19.5% interest. Enough to promise passive income without risk… provided that the stablecoin does not lose its value.
In France, the French investment service JustMining published a message on Twitter yesterday to give the alert. For its customers who would have chosen to go through its lending offer to receive income on their stablecoins, it will be necessary to act quickly because 40% of the product has exposure to the UST.
The failure of the stablecoin UST has serious repercussions on our lending product.
We invite our customers to read this article carefully: https://t.co/r7MdBhirud
We will come back to you quickly with new information.
— JustMining (@JustMiningFr) May 11, 2022
“For example, with a UST at $0.52 (11.05.22 at 4:30 p.m.) and an exposure at 39.58% of the lending, a client under these conditions will validate a loss of 18.98% of his position”explained the company, which has developed its lending service using several specialized platforms including… Anchor. “No matter which stablecoin you invest in on our platform, your capital is divided into different stablecoins”including the UST.
There is no reason to hope for a return to normal on the prices of Terra’s two digital assets. The only possibility of hope would be that the Luna foundation, the origin of the tokens, finds several billion dollars from investors to recapitalize its tokens. But investor confidence is certainly lost. And no financial analysis can go against that.
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