Crypto Volatility Is Crushing Stablecoins. Terra’s Unmooring Could Roil Bitcoin.

But perhaps nowhere have the declines been more painful than among stable currencies, a kind of cryptocurrency designed to never move in price from a fixation, often the U.S. dollar or other fiat currency.

Over the weekend, amid strong selling pressure, the stablecoin TerraUSD – one of the 10 largest cryptocurrencies – lost its link with the US dollar, trading at around 98 cents. On Monday, it happened again, with TerraUSD trading up to 65 cents during the minimum period on Tuesday, and the last stabilizing at around 90 cents.

The largest stable currencies (Tether and USD Coin) are assumed to be backed by cash or cash equivalents to help these tokens maintain their 1: 1 ratio against the US dollar. But Earth is different. TerraUSD, an “algorithmic” stable currency, primarily maintains its link to the dollar through a market mechanism that includes another token, Luna.

The Terra protocol allows traders to take advantage of an arbitrage opportunity when TerraUSD weakens below the value of a dollar. They can “burn” a TerraUSD for $ 1 a month, make a profit, and take a TerraUSD out of circulation when the price of the stablecoin falls below the dollar, or do the opposite when the TerraUSD strengthens.

But as billions of Earth dollars were thrown away on Saturday, everything fell apart, and other algorithmically stable currencies also felt the prey. While stable currencies backed by assets such as Tether and USD Coin maintained their holdings, Earth-like tokens fell, with Neutrino USD trading at 95 cents and Fei USD hovering around 98 cents.

“It remains to be seen whether each project will be robust enough to maintain its link during these volatile times,” Delphi Dgital, a cryptocurrency research firm, wrote in a report.

Luna Foundation Guard, the non-profit organization created to support the Earth, took action. Earth founder Do Kwon announced in March that the group would begin accumulating up to $ 10 billion in Bitcoin to support stablecoin as a reserve and what they put into use.

The foundation said Monday would lend $ 750 million in Bitcoin to market makers, or trading companies, that would help protect the level and liquidity of TerraUSD. The group also said it would lend 750 million TerraUSD in order to accumulate more Bitcoin as market conditions return to normal.

At the end of Monday, Earth’s defenders were forced to transfer 37,000 Bitcoins, some $ 1.2 billion at current prices, from the group’s 42,000 Bitcoin reserves directly to market bookmarks, according to Alex Thorn, head of the group’s research. cryptographic financial services.

Galaxy Digital

Luna’s published reserves fell from $ 3.2 billion on Friday to $ 201 million on Tuesday.

In the midst of the intervention, the price of Luna fell by a third from $ 82 on Friday to $ 31 on Tuesday. With the market capitalization of TerraUSD at $ 16.2 billion compared to $ 11.4 billion Luna, the very premise of the algorithmic stable currency, that 1 TerraUSD can always be exchanged for 1 dollar Luna, seems broken.

“The plug is still broken,” Thorn wrote in a note.

As Earth and other algorithmically stable currencies have grown in popularity over the past year, experts have expressed concern about how market mechanisms underpinning Earth and its peers could pose a risk to the wider cryptocurrency space.

“It’s not as significant as a money market fund‘ breaking money ’, but it’s adding to this lingering anxiety among crypto investors,” said Michael Safai, managing partner of cryptocurrency trading firm Dexterity Capital. “The longer it lasts, the greater the pressure on Bitcoin [and] Ethereum “.

Those concerns have been confirmed, with traders selling Ether to buy TerraUSD and supporting the peg, and selling Bitcoin in anticipation of the Luna Foundation Guard liquidating its holdings. The Wall Street Journal reported.

Although Bitcoin and Ether prices have risen from their worst lows on Tuesday, they are still down more than 20% from a week ago.

“[Luna Foundation Guard’s] The massive stock of Bitcoin, combined with the complicated mechanism by which the currency maintains its link, has created uncertainty about how the situation will unfold, “wrote Stephane Ouellette, CEO of the cryptocurrency firm.

FRNT Financial

(ticker: FRNT.Canada).

“Ether and Bitcoin are operating relatively in line with recent sales,” Ouellette said. “It is not clear whether currencies can maintain current levels given the evolution [Terra] situation that lacks a clear way of resolution ”.

Write to Jack Denton at

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