Bitcoin is now down 50% from November’s all-time highs.
Arthur Widak | Nurphoto | Getty Images
Investors in bitcoin I’m in a panic as the controversial stablecoin terraUSD slips further from the expected $ 1 peg.
TerraUSD, or UST, fell below 70 cents for the first time at the end of Monday as holders continued to flee the token in what some have described as a “bank run.” The token fell as low as 62 cents before recovering to trade at 90 cents on Tuesday, according to data from Coinbase.
Created by Singapore-based Terraform Labs in 2018, UST is what is known as “algorithmic” stablecoin. Part of the Terra blockchain project, it aims to track the value of the dollar, like other stablecoins tether and USDC.
However, unlike those cryptocurrencies, Terra has no cash and other assets held in reserve to back up its token. Instead, she uses a complex mix of code, along with a twin token called luna, to stabilize prices.
It’s important to bitcoin investors as Luna Foundation Guard, an organization that supports the Earth project, is sitting on billions of dollars worth of bitcoin that could potentially be dumped on the market at any time.
“Every professional cryptocurrency investor today has an eye on UST to see if it can hold its dollar peg, “said Matt Hougan, chief investment officer of Bitwise Asset Management.” There is clearly significant risk in the market. “
Put simply, the Earth Protocol destroys and creates new units of UST and moon to adjust the offer. When the UST price falls below the dollar, it can be taken out of circulation and traded for the moon, making the UST supply scarcer and raising its price – at least, that’s how it should work in theory.
To complicate matters further, Terra creator Do Kwon bought $ 3.5 billion worth of bitcoin to provide a backstop for UST in times of crisis. The theory was that UST could eventually be redeemed for bitcoin instead of the moon, but this has not been tested and has not yet been put into practice.
On Monday, Kwon’s Moon Foundation Guard said it would lend $ 750 millions of bitcoins to trading companies to “help protect the UST peg”, while another 750 million UST will be lent to buy more bitcoins “as market conditions normalize”.
In a follow-up tweet, the organization said it withdrew 37,000 bitcoins, worth more than $ 1 billion at current prices, to lend. “Very little” of the borrowed bitcoin has been spent, Luna Foundation Guard said, but “it is currently being used to buy” UST.
Several cryptocurrency investors are also concerned that Luna Foundation Guard may have sold, or will sell, much of its bitcoins to support UST. Amid all this uncertainty, UST’s decline has sent shockwaves across the cryptocurrency market.
Bitcoin, the largest digital currency in the world, It briefly dropped below $ 30,000, hitting its lowest price since July 2021. By 7:00 am ET, bitcoin was trading at $ 31,324, down about 5% in the past 24 hours. It is now down more than 50% from its all-time high in November.
Luna, the UST counterpart, has roughly halved the value in the past 24 hours. It was last traded at a price of $ 32.
“I think the market is expecting some forced sales here from Terra and the reserve,” Coin Metrics co-founder Nic Carter told CNBC. “It’s a calamity but a long-awaited one. No algorithmic stablecoin has ever succeeded and this one is no exception.”
He added that the problem with UST is that it is largely “backed by faith”.
“It’s not fully guaranteed, it’s certainly not fully backed up by reservations,” he told CNBC. “It was really just backed up by faith in the broadcaster effectively.”
Terraform Labs did not respond to multiple requests for comment.