Bitcoin investors panic as controversial crypto experiment unfolds
Bitcoin is now down 50% from its November all-time highs.
Arthur Widak | Nurphoto | Getty Images
Bitcoin investors are in panic mode as controversial stablecoin terraUSD pulls away from its predicted $1 peg.
TerraUSD, or UST, fell below 70 cents for the first time on Monday evening as holders continued to flee the token in what some described as a “bank run”. The token fell as low as 62 cents before regaining ground to trade at 90 cents on Tuesday, according to data from Coinbase.
Created by Singapore-based Terraform Labs in 2018, UST is what is known as an “algorithmic” stablecoin. Part of the Terra blockchain project, it is intended to track the value of the dollar, like other stablecoins tether and USDC.
However, unlike these cryptocurrencies, Terra does not have cash or other assets held in reserve to back its token. Instead, it uses a complex mix of code – alongside a sister token called luna – to stabilize prices.
This is important for bitcoin investors because Luna Foundation Guard, an organization supporting the Terra Project, is sitting on billions of dollars in bitcoins that could potentially spill into the market at any time.
“Every professional crypto investor has their eye on the UST today, to see if they can maintain their dollar peg,” said Matt Hougan, Chief Investment Officer at Bitwise Asset Management. “There is clearly a significant risk in the market.
Simply put, the Terra Protocol destroys and creates new units of UST and Luna to adjust the supply. When the price of UST falls below the dollar, it can be taken out of circulation and exchanged for luna, which makes the supply of UST rarer and increases its price – at least, that’s how it is. that should work in theory.
To complicate matters further, Terra creator Do Kwon purchased $3.5 billion worth of bitcoins to provide a safety net for the UST in times of crisis. The theory was that UST could eventually be exchanged for bitcoin instead of luna, but this has not been tested and has not yet been put into practice.
On Monday, Kwon’s Luna Foundation Guard said it would lend $750 million bitcoins to trading firms to “help protect the UST peg,” while an additional UST 750 million will be loaned to purchase more bitcoins “as market conditions normalize.”
In a follow-up tweet, the organization said it had withdrawn 37,000 bitcoins – worth more than $1 billion at current prices – to loan out. “Very few” of the borrowed bitcoins have been spent, Luna Foundation Guard said, but they are “currently being used to purchase” USTs.
Several crypto investors are also concerned that Luna Foundation Guard has sold or is selling a large portion of its bitcoins to support UST. Amidst all this uncertainty, the decline of the UST sent shockwaves throughout the crypto market.
Bitcoin, the world’s largest digital currency, briefly dipped below $30,000, hitting its lowest price since July 2021. As of 7:00 a.m. ET, bitcoin was trading at $31,324, down around 5% in the last 24 hours. It is now down more than 50% from its all-time high in November.
Luna, the counterpart to UST, has fallen by about half its value in the past 24 hours. It was last trading at a price of $32.
Adding to UST holders’ woes, Binance, the largest crypto exchange by market volume, said on Tuesday it was temporarily suspending withdrawals from UST and luna “due to a high volume of withdrawal transactions. pending,” citing network congestion.
The company said it would resume withdrawals for the tokens once the network stabilizes.
“I think the market is expecting some forced selling here from Terra and the reserve,” Nic Carter, co-founder of Coin Metrics, told CNBC. “It’s a calamity but a long-awaited one. No algorithmic stablecoin has ever succeeded and this is no exception.”
He added that the problem with the UST is that it is largely “backed by faith”.
“It’s not fully guaranteed, it’s certainly not fully backed by reservations,” he told CNBC. “It was really just backed by trust in the issuer.”
Terraform Labs did not respond to multiple requests for comment.
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