Crypto: a stablecoin is no longer stable and creates panic

Even redder than that of Bitcoin, the price of Luna, the cryptocurrency of the Luna Foundation, has fallen by more than 52% since Monday, dragging with it TerraUSD (UST) stablecoin. Very bad news for a digital currency that is supposed to follow the course of the dollar and never vary – leading the market capitalizations in the category of algorithmic stablecoins.

Overnight from Monday to Tuesday, for the second time in a matter of hours, the stablecoin fell to almost $0.68, far from its parity at 1 TerraUSD = 1 dollar. For many investors, this resulted in a devaluation of their portfolio, on a crypto-asset that they thought was stable, far from the risks associated with market fluctuations.


Update from 05/10/2022 at 09:30: down sharply, the price of Luna continues to be impacted by the decorrelation of the UST stablecoin against the dollar. The Binance cryptocurrency exchange platform has just announced its suspension of withdrawals on the two crypto-assets, in the face of “the slowness and congestion of the network”. The volume of trading reached heights by panic effect on the market.


Original post:

The Terra USD (UST) price drop started around 6 p.m. yesterday. The stablecoin was at its lowest at 2:30 a.m., after a sensational drop for the previous thirty minutes. And since 5 a.m., investors have been struggling to restore a course backed by that of the dollar, with a mechanism causing the Luna cryptocurrency to de facto plunge.

As a reminder, stablecoins are used – by large and small wallets alike – as a reserve while waiting to buy cryptocurrencies such as bitcoin or ether. They are also used to secure profits after a capital gain on an asset, while avoiding being taxed on them.

Because in France, to be taxed, you have to exchange your cryptocurrencies for money in a fiat currency like the Euro or the Dollar – in other words, “exit” your capital from the field of digital assets.

The impressive drop in the price of the UST stablecoin © TradingView

An algorithmic stablecoin

But then, why did TerraUSD de-correlated from the dollar, which it was supposed to follow? Last night, the crypto community was once again reminded of one of the limits of so-called “algorithmic” stablecoinsunlike collateralized stablecoins like USDC, USDT, BUSD.

More dangerous, they are not based on a reserve of the asset they follow but on a mechanism that burns or creates tokens according to need. If they have advantages over other stablecoins, the situation shows us that their devaluation risks are significant.

Currently, to drive up the price of TerraUSD, traders are “burning” tokens in exchange for new Terra (LUNA) coins. The cryptocurrency on which the mechanism is based therefore increases its supply, and therefore lowers its price. This therefore explains its massive fall at the same time.

However, the disruption of TerraUSD is so pronounced that the Luna Foundation had to go even further to regulate its stablecoin at all costs. During the night, the foundation’s bitcoin wallet was completely emptied in order to be able to reinject capital into TerraUSD (UST), at the request of the South Korean developer Do Kwon, co-founder of the stablecoin.

In the next few hours, it will be necessary to look particularly at the price of Luna to know the fate of the UST. If the cryptocurrency collapses even more, it will be very difficult for the stablecoin to be able to save itself. Many investors have understood this and are withdrawing en masse from this asset.


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Crypto: a stablecoin is no longer stable and creates panic


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