Terra USD (UST) Crashes to $0.68
The market downturn that sent Bitcoin (BTC) reeling has created a stress test for Terra USD (UST). The stablecoin, which expanded in 2022, lost its peg to the dollar and sank to a low of $0.68 on Tuesday, while other stablecoins fluctuated between $1 and $0.99.
USDT trading accelerated, moving close to $100B in 24 hours, as traders sought a more stable asset to avoid altcoin volatility. Later, UST managed to claw back some value and return to $0.79, despite the promise that LUNA and BTC backing would keep it within 2% of the dollar peg.
Over the course of a day, BTC quickly lost positions, starting at around $34,000 and dipping to $30,831.59. This rapid crash was developing as expectations of a deeper slide started to be fulfilled. BTC traded volumes of nearly $50B in 24 hours, losing hundreds of dollars within minutes.
What Terra Means for Downshifting
The Terra DeFi ecosystem planned to buy up to $10B in BTC coins. Along with LUNA, they would serve as collateral and to save the dollar peg of UST.
Unfortunately, the system had to be stress-test just months after its launch. Terra actually had to sell spot BTC to ensure UST stays within bounds. At the same time, the stablecoin sank to $0.98. This kind of fluctuation is immense for a stablecoin, and may translate into further panic. Only once has USDT broken its dollar peg, exacerbating the 2018 bear market. USDT has dipped as low as $0.89, but other algorithmic stablecoins have unraveled even more.
UST has spread to most large exchanges, including FTX, Binance, Kraken and others. The asset is also heavily used for altcoin pairs on Bitfinex. In DeFi, UST has been integrated into CurveFinance, the Trader Joe decentralized exchange, and PancakeSwap.
LUNA itself lost more than 55% in a day, down to $28.17 and out of the top 10 list of coins. The paradox of UST is that it could cause a vicious cycle, where low asset prices would lead to more selling and even bigger price drops.
Terra LFG will try to keep the UST peg by a series of DeFi operations and additional trading to hedge risk.
This will be a risky move, given the potential for other market moves related to panic and rapid selling. If successful, however, the ability to mitigate downward price moves will boost the importance of Terra.
Some of the explanations for the crash of LUNA was that a big account sold UST and triggered a bank run around May 8. However, the event spilled over to the wider market, extending the fear of secondary effects.
A similar event happened to Neutrino USD (USDN), which was backed by assets on the Waves (WAVES) network. USDN managed to move closer to its peg and currently remains at $0.98.
BTC Market Shifts to Selling
After many encouraging weeks of data showing a trend to hold coins, the latest price slide is showing a reversal. This time, exchanges note more inflows than outflows. There are signs that miners have started a slow liquidation process of their near-record holdings of idle coins.
On-chain activity has increased, as well as deposits to exchanges. This is a sign that the readiness to hold the coins can shift within days.
After the Crypto Fear and Greed Index fell to 11 points or Extreme Fear, the physical coin sales may also accelerate. The reason for this may be a capitulation from retail, but also an attempt to re-buy lower.
Both BTC and ETH were sent to exchanges, showing net inflows and more selling pressure.
Additional panic is coming from mixed signals on whether the BTC bottom has passed. On the one hand, BTC has completed a long series of weekly slides, possibly turning the trend. On the other hand, the pressure from Terra may move prices in unpredictable ways.
A dip under $30,000 may also start to liquidate leveraged positions at that level, leading to a chain reaction of liquidations. The rough prediction of such a chain reaction may see BTC unravel to $16,000.
A longer bear market may also bring BTC down to $10,000 again, according to the most extreme predictions. With rapid unraveling, BTC may lose its appeal as a hedge against inflation, especially given its failure to preserve its value year-on-year. Based on Glassnode data, another 10% of buyers and holders are underwater in a week.
At this point, the Rainbow Chart for BTC suggests prices are in the accumulation range. However, Glassnode metrics show that accumulation has slowed own, pressured by one of the worst months in the past few years. With BTC erasing value fast, buying is becoming more unappealing and accumulation may actually be delayed until signs of reversal.
One of the scenarios for BTC sees a prolonged bear market extending for years, similar to 2018 and 2019. BTC has also shown it is not selected as a hedge asset and actually moves down along with other asset classes considered overheated.
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