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Terra's stablecoin UST collapses, LUNA falls 99%

Terra's (LUNA) price plummeted by over 99 percent in a week, wiping out crypto investors' fortunes

Published: May 12, 2022 06:29:16 PM IST

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Terra's (LUNA) price has dropped to just $0.5 in the last 24 hours. Over the last seven days, the once-popular cryptocurrency has lost almost 99 percent of its value, and over 96 percent in the last 24 hours alone. Terra's USD-backed stable coin – TerraUSD(UST) – is presently worth around $0.6, down by over 33 percent in the last seven days, similar to LUNA.

The stablecoin had already dropped 55 percent on Tuesday, and lost another 85 percent on Wednesday. It has wiped out nearly 95 percent of the investors' wealth in the last few days. The token hit an intraday low of $4.21 on Wednesday, after trading at around $66 on Monday. Surprisingly, the token is now 97 percent below its all-time high of $118, scaled just a month ago.

The recent price drop in Terra has come as a wake-up call for cryptocurrency investors, with analysts predicting additional declines in the value of both LUNA and UST. WazirX Trade Desk was quoted as saying that the latest TerraUSD debacle had contributed to the market's challenges.

TerraUSD is a US dollar-pegged stablecoin. Its price is meant to be the same as a dollar. However, it has lost its peg twice in the last couple of days and has not recovered. According to experts, the Terra collapse might put retail and institutional investors at risk.

“While this is a relatively small-cap cryptocurrency and its footprint is relatively contained, it still has some major implications for the sector, particularly if it spooks lawmakers or regulators already concerned about stablecoin collapse,” CoinDesk pointed out in its newsletter 'State of Crypto'.

Other prominent stablecoins, such as Tether (USDT), USD Coin (USDC), and Binance Dollar (BUSD), have maintained their prices at around $1 despite the current crypto market slump.

According to experts, the UST fiasco exposed the shortcomings in algorithm-based stablecoins. The stablecoins like USDT, USDC, and BUSD are backed by actual dollar reserves as quoted by the issuers of these cryptocurrencies. This means that for every unit of these stable coins, a matching US dollar is locked in a bank account somewhere.

Although Do Kwon, the creator of Luna Foundation, has been reassuring the public and just tweeted about how they will bring back the peg. Luna and all of its DApps, such as Anchor Protocol, have been seriously impacted.

"The recovery of LUNA will be dependent on remedial actions taken by the parent network/LGF, which has amassed a sizable Bitcoin reserve through a series of large-scale Bitcoin acquisitions," as quoted by BuyUcoin cryptocurrency exchange.

There is an intrinsic risk involved with stablecoin projects, and investors should not blame the project founders or the industry as a whole because of the innate risk of these types of projects, which should be understood earlier and invested accordingly.

Not only Terra, but other big crypto tokens such as Bitcoin and Ethereum have plummeted and lost a major fraction of their 2021 gains. Shiba Inu, like other cryptocurrencies such as BNB, Solana, Cardano, XRP, and Dogecoin, has seen a major drop too.

Shashank is the founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash