It is a very powerful and very brutal expiration that the cryptocurrency market has invited us to follow for the past three days. In addition to Bitcoin and Ethereum each falling more than 20%, the impossible happened with stablecoin TerraUSD (UST), which fell off its dollar tracking Monday night.
As a result 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 below $0.18 this morning (05/22/22 at 11:45 AM). The losses are almost total for investors who have bought the crypto in recent months. Luna ranks 63rd among cryptocurrencies in terms of capitalization and is dangerously close to zero dollars. One of the biggest cryptocurrency crashes to date.
Last night, a final bounce occurred, causing an increase of over 400% in Luna’s price. But it didn’t last long and the baseless 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 wasn’t enough. The pinnacle 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 about its fall published Tuesday, it is an algorithmic stablecoin, which does not rely on a reserve of the fiat currency it runs on, which is placed in a bank. The TerraUSD is based on an arbitrage mechanism, the operation of which is based on the Luna cryptocurrency (from the same Terra blockchain). Simply put, when the price of a UST falls below a dollar, the exchange mechanism burns a UST against a dollar of Luna.
As a result, Luna’s price slumped in bearish pressure, and the sudden arrival of extraordinary volume turned the mechanism. The cryptocurrency entered a spiral where investors retreated en masse (we are talking about $40 billion vaporized) and where the price continued to fall without any support or psychological barrier. On the other hand, investors are also withdrawing from the UST – which had lost what characterized it: the stability of its price.
What caused the crash will be a very big problem. 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 certainly enriched themselves for billions. Do Kwon, the developer behind the Terra blockchain (which claimed to want to “kill” competing stablecoins like DAI), may be under investigation.
Consequences in France
UST has risen in the rankings of the most popular stablecoins in recent months and was in third place until this week. Its success is mainly due to staking platforms, including Anchor (52% of UST reserves), based on the Terra blockchain. This allowed investors to deposit an amount of their stablecoins into an investment at 19.5% interest. Enough to promise passive income risk-free…provided the stablecoin doesn’t lose its value.
In France, the French investment service JustMining published a message on Twitter yesterday to give the alert. For his customers who would have chosen to go through his loan offer to receive income on their stablecoins, it will be necessary to act quickly as 40% of the product is exposed to the UST.
The failure of the stablecoin UST has serious consequences for our lending product.
We invite our customers to read this article carefully: https://t.co/r7MdBhirud
We will get back to you soon with new information.
— JustMining (@JustMiningFr) May 11, 2022
“For example, with a UST of $0.52 (11.05.22 at 4:30 PM) and 39.58% exposure of the loan, a client under these terms will validate a loss of 18.98% of its position”explains the company, which has developed its lending service using several specialized platforms, including… Anchor. “It doesn’t matter which stablecoin you invest in on our platform, your capital is divided into several stablecoins”including the US.
There’s no reason to hope for a return to normal prices for 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 has certainly been lost. And no financial analysis can compete with that.