Terra (LUNA) Joins Bitcoin (BTC) Buying Spree
Terra (LUNA) became the most unusual Bitcoin maximalist, after joining the buying spree in the mode of Tesla, Inc. and MicroStrategy. But Terra had a different incentive to acquire BTC – its goal was to have additional backing for its algorithmic stablecoin, UST.
As BTC moved up and revisited $43,000, the Terra announcement did not help the price much. Still, the team bought BTC worth around $125M.
The recent buy is just a part of the plan for Terra to buy up to $3B worth of BTC.
As of March 2022, some reports see Terra holding as much as $1B worth of BTC in its portfolio. Thus, even now, Terra is the third-largest organization with a significant BTC wallet.
Terra is one of the fastest-growing DeFi protocols, and will have the incentive to hold the BTC as collateral, essentially taking more coins off the market.
Is the Terra Investment Safe
The Terra decision to buy BTC is explained with the need to have backing for UST, the algorithmic stablecoin. This asset is minted when LUNA tokens are locked, but recently, Terra added other forms of collateral.
UST minting is happening on other networks as well and is supported with different tokens such as WAVES. But the BTC stash may be more encouraging for new traders to trust UST.
Skeptics noted that the decision of Terra to buy BTC is starting to look like an attempt to mint an exorbitant amount of UST, especially during a bull market. It is unknown how much risk Terra would be ready to take, but there is a not insignificant probability that the collateral falls below the value of all UST minted.
Terra USD is already a top 15 coin, with a supply of 15.59B tokens. Most of the supply was added since November 2021, and the supply has grown five times since then.
During that period, the value locked in Terra grew from around $9B to above $26B. In the meantime, UST spread to Near Protocol, Waves, Avalanche and other networks. The goal of UST is to become the asset for Web3 projects, decentralized exchanges, play to earn games and NFT sales.
The big uncertainty around Terra is whether the collaterals will be sufficient and won’t lead to excessive and circular UST minting. In theory, the newly minted UST could be used to buy more BTC, thus also propping up a bull market.
For Terra supporters, the established system of collaterals can hold, and make the project work to provide a more agile and intuitive asset, UST. On its side, UST is not held passively, but helps move value through trading, staking in liquidity pairs or other tasks within a growing ecosystem.
Unlike the Bitconnect scheme of 2017, there is less incentive to cash out, and more projects that incentivize traders to hold crypto for the long term. Additionally, Terra performs regular LUNA burns and is careful about the backing of UST.
UST also has the track record of DAI, which managed to keep its dollar peg and add more assets as collateral. Algorithmic stablecoins can be risky, and some projects have failed during earlier, less liquid stages of the crypto market.
Other Networks Copy the Terra Model
Other networks have also seized the idea of a collateralized algorithmic stablecoin. Cardano is the latest blockchain to announce similar plans. This is in addition to partner blockchains adopting Terra and supporting UST.
The trend is following a general growth of stablecoins, whether backed by dollar or fiat assets or by other crypto collaterals.
In 2022, stablecoins manage to keep their dollar peg, with no significant deviations. They are also an essential tool for moving funds, especially for international traders. Binance holds USDT and BUSD wallets with significant market influence, as the asset can be used to move funds between markets in a more predictable way. Terra specifically will market UST not as an algorithmic coin but as a BTC-backed asset.
Can LUNA Go Above $100
A rising LUNA value may be good for the UST ecosystem. LUNA is not only burned, but also invested in growth projects, further making the case for the reliability of UST.
LUNA traded above $92 on Tuesday, though the asset expects a continued price expansion. The biggest support is the constant burning of LUNA supply, happening every day.
The short-term expectation is that LUNA will move above $100 in the short term. In the longer term, the Terra protocol is seen as reflecting the growing and concentrating value of multiple token projects, but also by proxy the price of BTC. LUNA may reflect the growth of crypto projects even better compared to Ethereum (ETH).
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