Terra Luna's fall: Is this cryptocurrency's 2008 financial crash moment?
6/8/2022, 05:33 PM
Stablecoins send shockwaves through cryptocurrency markets, wiping billions off their value and causing Bitcoin to crash.
The two main stablecoins from the crypto project Terra have gone into free fall, with some calling the incident a Ponzi scheme akin to the collapse of Lehman Brothers which precipitated the 2008 financial crisis.
Stablecoins claim to be a relatively safe haven in the highly volatile crypto market. They are meant to be tied to a fiat currency and usually maintain a 1-to-1 peg with the US dollar. But recent events have proven that they are just as volatile as other cryptocurrencies.
The stablecoin TerraUSD, or UST, crashed almost completely at one point on Thursday and lost its $1 peg (€0.96) to the dollar, tanking to a low as $0.26.
Terra was ranked among the 10 most valuable cryptocurrencies and peaked at almost $120 (€115.28) last month.
Meanwhile, TerraUSD’s sister token Luna fell by more than 97 per cent on Wednesday, dropping below $0.22. By Friday, Luna collapsed to nearly $0.
How did the crash happen? UST, created by Terraform Labs, is an algorithmic stablecoin, which means that instead of having cash and other assets held in a reserve to back its token, it uses a complex mix of code and Luna to stabilise the process.
Crypto is full of gullible people who are sure there's a lot of money in Ponzinomics and they will get rich even though those other fools will lose their money.
David Gerard “The idea of an algorithmic stablecoin is instead of having a backing reserve you have a sort of messy, a lower quality banking reserve. It's a way to claim that you're building a stable thing out of unstable things,” said David Gerard, the author of the book Attack of the 50 Foot Blockchain.
“Luna was supposedly a governance token, which is a way to pretend that made up Ponzi money is not made up Ponzi money,” he told Euronews Next.
Things were made even more complicated after Terra’s creator Do Kwon purchased $3.5 billion (€3.3 billion) worth of Bitcoin to support UST in the event of a crisis.
Kwon’s Luna Foundation Guard then said in a tweet it had withdrawn 37,000 Bitcoins - worth more than $1 billion (€962,000,000) at current prices - to lend out.
The company said “very little” of the borrowed Bitcoins have been spent, but it is “currently being used to buy” UST. Many worry that the Luna Foundation Guard will sell a large part of its Bitcoin to support UST.
“I think the compelling aspect of this story is they did a small 2008 financial crisis themselves,” said Gerard.
“In the 2000s, when money was great, people had so much money, they couldn't even invest it fast enough. They said what's safer than real estate? Real estate doesn't go down. So let's bet on mortgages and loans based on mortgages. And so you had equivalents backed by a derivative of the price of th
The two main stablecoins from the crypto project Terra have gone into free fall, with some calling the incident a Ponzi scheme akin to the collapse of Lehman Brothers which precipitated the 2008 financial crisis.
Stablecoins claim to be a relatively safe haven in the highly volatile crypto market. They are meant to be tied to a fiat currency and usually maintain a 1-to-1 peg with the US dollar. But recent events have proven that they are just as volatile as other cryptocurrencies.
The stablecoin TerraUSD, or UST, crashed almost completely at one point on Thursday and lost its $1 peg (€0.96) to the dollar, tanking to a low as $0.26.
Terra was ranked among the 10 most valuable cryptocurrencies and peaked at almost $120 (€115.28) last month.
Meanwhile, TerraUSD’s sister token Luna fell by more than 97 per cent on Wednesday, dropping below $0.22. By Friday, Luna collapsed to nearly $0.
How did the crash happen? UST, created by Terraform Labs, is an algorithmic stablecoin, which means that instead of having cash and other assets held in a reserve to back its token, it uses a complex mix of code and Luna to stabilise the process.
Crypto is full of gullible people who are sure there's a lot of money in Ponzinomics and they will get rich even though those other fools will lose their money.
David Gerard “The idea of an algorithmic stablecoin is instead of having a backing reserve you have a sort of messy, a lower quality banking reserve. It's a way to claim that you're building a stable thing out of unstable things,” said David Gerard, the author of the book Attack of the 50 Foot Blockchain.
“Luna was supposedly a governance token, which is a way to pretend that made up Ponzi money is not made up Ponzi money,” he told Euronews Next.
Things were made even more complicated after Terra’s creator Do Kwon purchased $3.5 billion (€3.3 billion) worth of Bitcoin to support UST in the event of a crisis.
Kwon’s Luna Foundation Guard then said in a tweet it had withdrawn 37,000 Bitcoins - worth more than $1 billion (€962,000,000) at current prices - to lend out.
The company said “very little” of the borrowed Bitcoins have been spent, but it is “currently being used to buy” UST. Many worry that the Luna Foundation Guard will sell a large part of its Bitcoin to support UST.
“I think the compelling aspect of this story is they did a small 2008 financial crisis themselves,” said Gerard.
“In the 2000s, when money was great, people had so much money, they couldn't even invest it fast enough. They said what's safer than real estate? Real estate doesn't go down. So let's bet on mortgages and loans based on mortgages. And so you had equivalents backed by a derivative of the price of th