Fear and anxiety are descending upon the once buoyant and bold crypto market. In 72 frantic hours, the cryptocurrency Luna and its associated stablecoin TerraUSD fell more than 99%, sparking fears about the volatility of the crypto sector.
Following the crash, Twitter and Reddit were inundated with messages from investors describing how they lost most of their savings in the blink of an eye. On Reddit, which is widely used by small investors to talk about their operations in the financial markets, many claimed to have lost tens of thousands and even hundreds of thousands of dollars in the crash. Some of the comments expressed such desperation that forum moderators have pinned the number of suicide helplines at the top of the thread.
TerraUSD, otherwise known as UST, was founded by the Singapore-based company Terraform Labs in 2018. It is an algorithmic stablecoin that aims to maintain parity with the US dollar, meaning that a TerraUSD owner should always be able to exchange the token for one US dollar. But the stablecoin lost its peg to the dollar and dropped to just 23 cents before bouncing back somewhat. This crash affected Luna, its sister token, which can be swapped with TerraUSD and vice versa. In this crypto ecosystem, an investor makes gains when they exchange Luna for TerraUSD, when TerraUSD is below the US dollar, given the expectation that the cryptocurrency will bounce back to parity. This however is not happening. Instead, analysts say the cryptocurrency has entered a death spiral. As of Thursday, Luna was trading for less than 10 cents, compared to nearly $100 a few weeks ago.
Terra’s creator, Do Kwon, has tried to stabilize the situation by drawing on his huge bitcoin reserves. The South Korean businessman spent $750 million in bitcoin to maintain the stablecoin’s parity, but those efforts have so far been unsuccessful. As investors panicked, Kwon tried to allay concerns in a message on Twitter. “I understand the last 72 hours have been extremely tough on all of you – know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” he wrote on Wednesday.
1/ Dear Terra Community:
— Do Kwon 🌕 (@stablekwon) May 11, 2022
It is still not clear why TerraUSD lost its peg to the US dollar. Some experts say it was a coordinated attack to profit by betting on its fall. In this case, $300 million worth of TerraUSD would have had to be sold in a matter of seconds. This theory comes as the website CoinDesk reported that the European Commission is considering banning large stablecoin transactions.
The scale of the crash is so great that many have compared it to the bankruptcy of the Lehman Brothers investment bank in 2008, which forced the US authorities to bail out a number of financial institutions to stop the entire system from collapsing.
The panic has extended to bitcoin, which has lost 20% of its value in the last five days. Bitcoin is now trading at $27,700, compared to $68,000 in November – a fall of more than 50% in six months. Meanwhile, shares in Coinbase, one of the most popular cryptocurrency exchange platforms, fell 26% on Wednesday. In the past six months, it has shed more than 80% of its value. But while the losses are great, bitcoin supporters say that the cryptocurrency has been through worse crises and bounced back.
Although the wider consequences of the Luna crash are still unknown, it seems clear that it strengthens the argument of regulators who have been warning small investors that the volatility of cryptocurrencies can lead to total losses. US Treasury Secretary Janet Yellen used the crash to explain why the sector needs proper regulation. “I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks,” she told the Senate.
Following Luna’s fall, Changpeng Zhao, the founder of Binance, which is the largest cryptocurrency exchange platform in the world, said in a message on Twitter that “we need to respect the market, with a level of caution.” “We are in a new market, with many innovations,” he wrote. “Some innovations will become successful, many won’t.”
Meanwhile, on Reddit, investors continued to commiserate about losing their savings. One said they had lost around $450,000: “I cannot pay the bank. I will lose my home soon.”