Crypto market analysts are looking for where to blame as Bitcoin prices plunged on Monday.
Correlation with stocks is definitely a major factor. Cryptocurrencies declined along with
Standard & Poor’s 500
Indicators With investors worried about the possibility of an economic recession in the United States amid high interest rates and the highest rate of inflation in decades.
But it is possible that there was at least another force that pushed
to its lowest since July 2021, to less than $33,000 on Monday from about $36,000 on Friday. Look no further than TerraUSD, which is a so-called stablecoin that is meant to be pegged to the US Dollar, and
Another cryptocurrency that helps Terra maintain its link.
While the largest stablecoins –
USD . coin
Backed by cash or cash equivalents to help these tokens maintain their 1:1 relationship to the US dollar, Terra is different. As an “algorithmic” stablecoin, TerraUSD essentially maintains its peg to the dollar through a market mechanism that includes another cryptocurrency, Luna.
The Terra protocol allows traders to take advantage of an arbitrage opportunity when TerraUSD weakens below the value of the dollar. They can “burn” TerraUSD for $1 from Luna, make a profit and take TerraUSD out of circulation when the stablecoin price drops below the dollar, or do the opposite when TerraUSD gets stronger.
TerraUSD’s popularity has exploded over the past year, helping to drive Luna’s price up from around $35 in October to $116 last month.
But it all hit a whirlwind over the weekend. sudden selling pressure TerraUSD caused the dollar to de-peg, falling to 98.6 cents on Saturday, and Luna down 25% since Friday.
The decoupling appears to be the result of a series of Terra withdrawals from the Anchor Protocol, a decentralized lending market that allows TerraUSD depositors to reap high returns. A lot of the 18.7 billion TerraUSD in circulation on Anchor, which has seen its stablecoin deposits drop from $14 billion on Friday to less than $11 billion by Monday, is closing.
Stablecoins are supposed to be boring, without the volatility of Bitcoin. It serves as a monetary bridge between the worlds of fiat and cryptocurrencies, is the foundation of the $2 trillion digital asset market, and plays an important role in the crypto financial system.
Volatility in Luna and TerraUSD, which are the ninth and tenth largest digital assets, is no small feat.
“Saturday’s massive withdrawals from the Anchor protocol terrestrial treasury showed the fragility of the algorithmic stablecoin as its price, which is supposed to be pegged to the US dollar, was de-pegged,” said Yuya Hasegawa, an analyst at crypto exchange Bitbank, also referring to the crash. in Luna. “Selling altcoins affected the price of bitcoin.”
Marcos Sotiero, an analyst at digital asset broker GlobalBlock, echoed that sentiment. “There is fear in the crypto space as well with TerraUSD,” he said.
This is not the first time TerraUSD has decoded from the dollar, but this is probably the most well-known incident. Terra founder Do Kwon announced in March that $10 billion worth of Bitcoin would be purchased in reserves to protect Terra’s peg.
The Luna Foundation Guard, which was created to protect Tira and counts Kwon among its leaders, He said in a statement They were mobilizing to ensure market stability. The foundation said it will lend $750 million worth of Bitcoin to market makers, or trading firms, which will help protect TerraUSD’s peg and liquidity. The group also said that it will lend 750 million TerraUSD for the purpose of accumulating more bitcoin as market conditions normalize.
With Terra coins and other algorithmic stablecoins on the rise in popularity, experts have raised concerns about how the market mechanisms that underpin Terra and its peers could pose a threat to the broader crypto space.
at Series of tweets and tweets Over the weekend, Terra founder Kwon indicated support for the theory that the stablecoin depeggling was the result of a coordinated attack. This combo They are widely spread within the crypto community.
Write to Jack Denton at firstname.lastname@example.org