The Terra (LUNA) crash, and the potential for a crypto winter

May 12, 2022

           The crypto market, as volatile as it always has been, usually stays within a range in which it fluctuates. There are ups and downs, bull and bear market situations, but lately, we have seen some unprecedented losses that might affect not only the cryptocurrency sphere but the world economy as a whole, skyrocketing the fear indexes of whales and regular day traders.

UST, a mainstream stable coin, de-pegged from their 1 dollar pair, sending LUNA, their sister coin which is deeply intertwined in the algorithm that kept UST in the 1 dollar mark, into lows never seen before, and eroding the confidence of millions of investors not only in these 2 coins but in the whole cryptocurrency system as a storage of value for their savings.

A stable coin is usually seen as a “safe bet” when it comes to cryptocurrencies. Their value is linked or pegged to the value of a regular fiat currency (most of the time it is linked to USD), therefore, investors hold these stable coins simply as a way to keep their savings secure even if the USD might suffer losses due to inflation, it is, in a way, the price to pay for not having to worry about the day to day volatility of the crypto market.

Therefore, when something such as the de-pegging of UST happens, which also caused LUNA to drop and lose over 90% of its value, investors who trusted in the solidity of the project felt betrayed and lost all the faith and support they had for the project and even their trust for the whole crypto ecosystem.

The crash of UST/LUNA is seen by many as a potential catalyzer for a long term “crypto winter”, and it is already showing some side effects, such as Bitcoin itself dropping below the 26k mark, and even the looming potential of USDT itself de-pegging from their usual 1 Dollar mark, as it reached the 94 cents value, causing also a massive sell-off from panicking holders who consider the possibility of USDT following the steps of Terra USD.

Not everything is doom and gloom, although this situation seems disastrous for the cryptocurrency sphere, it can also bring new opportunities for traders and shorters. The possibility of the LUNA ecosystem recovering from this is not something to be discarded, Do Kwon himself has stated in a series of Tweets his acknowledgment for what has occurred this last couple of days and his plans to mitigate the damage and recovery of UST as well with its potential repeg:

“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it.”

          Logarithmic reliant systems holding the value of cryptocurrencies might seem like the ideal way to keep their value stable or even rising, but these systems are sometimes vulnerable to unusual or unexpected market movements created by holders or groups trying to disrupt the ecosystem for their own benefit, such as what happened last year with the NFT game CryptoMines, brought down in a matter of days by a coordinated market attack from whales and other factors.

Even Changpeng Zhao, CEO of Binance, has Tweeted his own opinion regarding the LUNA/UST issue, which I believe serves as a great closing point for this article:

“We are in a new market, with many innovations. Algo stable coins is one of them. When they are hot, they are all the rage. When they drop, it can be a vicious circle. Some innovations will become successful, many won’t. At the end of the day, we need to go back to fundamentals. Build real products, not reliant on short-term incentives, or promotions, but with intrinsic value that people use. More than anything else, we need to humbly respect the market, and not be cocky. Build step by step, day after day. And leave the rest to market and time.”

          Whatever the outcome of this sudden crash might be, always stay diligent when it comes to your investments allocated to crypto, remember to DCA, keep your eyes away from charts and take a breather every once in a while. The crypto market is still young, and we are currently experiencing its growing pains.

Isaac Vitales