It has been a stressful week for those who own bitcoin and other cryptocurrencies, as they watched billions of dollars get wiped off the value of their assets.
Key points:
- Terra (UST) value is backed by a “sister” token called Luna
- Luna’s value plunged 99pc, causing some investors to lose their life savings
Bitcoin plunged below $US25,500 this week — a sharp decline from the record high $US69,000 price tag that it commanded back in November.
Since then, the overall crypto market (which includes thousands of digital currencies and tokens) has seen its value plummeted by more than 50 per cent since then.
Analysts said the crash of the TerraUSD “stablecoin” (or UST) was the main reason behind this week’s cryptocurrency sell-off.
Terra can be swapped for Luna tokens (at a small profit) when it dips below $US1. By theory is to keep the value of both stable.
However, these complex algorithms somehow failed drastically.
In what has been described by analysts as a “death spiral”, Luna somehow crashed at the same time as UST. Essentially, investors rushed to liquidate their digital assets quicker than the “algorithmic” stabiliser could kick in.
The price of the “sister” token dropped from about $US86 at the start of this week, to just over 6 US cents on Thursday.
Nobody knows the cause of Terra and Luna prices to crash.
Many on social media point fingers at the big US hedge funds, due to the massive trades involved. Two firms, Citadel Securities and BlackRock denied any involvement in Terra’s crash.
“We don’t know if the momentum was created by collusion [between hedge funds],” said Lisa Wade, the CEO of blockchain company DigitalX.
“Conspiracy theorists would say ‘yes’, because it’s a massive trade. I mean, in all of my career, it’s one of the biggest trades that I’ve seen,” she told ABC’s The Business.
“It’s almost like an evil genius plot, because there are a lot of steps to it.”
“So obviously we’re in a really volatile risk-off stage of the market — because of everything that’s been happening with the [US] Fed and the macro environment.
“They waited until a Saturday night when [trading] volumes were very low, and there were no bids.
“And then they went into a trading pool and started selling UST in massive volumes, which then triggered all of the subsequent selling in a low-volume market that broke the [US dollar] peg.
“Inside the algorithm was what our team had identified as a ‘death spiral’ … the selling starts to feed on itself from the mechanics of the algorithm.
“So when the death spiral kicked in … the algorithm started selling Bitcoin and Avalanche [another cryptocurrency], which triggers more selling.
“Luna was impacted because it’s the underlying [backer] of the UST. So every time a UST [token] is bought, a Luna [token] is burnt, which means there’s less tokens in supply, so the Luna price goes up.
“The reverse applies when people start selling. So every time someone sells a UST, they mint a Luna, which means there’s more volume.
“And if there’s no buyers and the price goes down, then it starts to feed on itself, because people start panicking and selling Luna.
“This was an exploitative trade that took advantage of the fact that markets are weaker. The perfect storm was nobody stepping up to buy the bitcoin and the UST”.
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