May 25, 2022

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Bitcoin (BTC) investors panic as terraUSD (UST) drops below $1

Bitcoin (BTC) investors panic as terraUSD (UST) drops below $1

Bitcoin is now down 50% from its all-time high in November.

Artur Widak | Norfoto | Getty Images

Investors in Bitcoin In a panic as the controversial stablecoin terraUSD slipped more than the intended $1 peg.

TerraUSD, or UST, sank below 70 cents for the first time late Monday, as holders continued to flee the token in what some described as a “bank run.” The token fell to 62 cents before regaining ground to trade at 90 cents on Tuesday, according to Coinbase data.

Created by Terraform Labs in Singapore in 2018, UST is what is known as an “algorithmic” stablecoin. Part of the Terra blockchain project, which aims to track the value of the dollar, such as the associated stablecoins Tether and USDC.

However, unlike those cryptocurrencies, Terra does not have cash and other assets held in reserve to back its token. Instead, it uses a complex combination of code – along with a sister code called Luna – to stabilize prices.

It is important to bitcoin investors that the Luna Foundation Guard, an organization that supports Project Terra, has billions of dollars of bitcoin that can be dumped on the market at any time.

Every professional crypto investor has one eye on UST today, said Matt Hogan, chief investment officer at Bitwise Asset Management, watching to see if it can maintain its peg to the dollar. “Obviously, there are significant risks in the market.”

In simple terms, the Terra . protocol Destroys and creates new units of ground tanks and Luna to adjust the width. When the floor tanks fall below the dollar, they can be taken out of circulation and replaced with luna, making the supply of floor tanks more scarce and increasing their price – at least, that’s how it should work in theory.

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To further complicate matters, Terra creator Do Kwon has bought $3.5 billion worth of bitcoin to provide support to UST in times of crisis. The theory was that the treasury could eventually be exchanged for bitcoin instead of luna, but this had not been tested and not yet put into practice.

On Monday, Kwon’s Luna Foundation Guard said it would lend $750 1 million bitcoins to commercial companies “to help protect the interconnection of terrestrial reservoirs,” while another $750 million will be loaned to buy more bitcoin “as market conditions return to normal.”

In a follow-up tweet, the organization said it has withdrawn 37,000 bitcoin – worth over $1 billion at current prices – for lending. The Luna Foundation Guard said that “very little” of the bitcoin borrowed has been spent, but that it is “currently being used to purchase” underground vaults.

Many cryptocurrency investors are also concerned that the Luna Foundation Guard has sold or will sell a significant portion of bitcoin to support terrestrial treasuries. Amid all this uncertainty, the slump in underground treasuries sent shock waves throughout the cryptocurrency market.

Bitcoin, the world’s largest digital currency, It briefly fell below $30,000, reaching its lowest price since July 2021. As of 7:00 AM ET, bitcoin was trading at $31,324, down about 5% in the past 24 hours. It is now down more than 50% from its all-time high in November.

The value of Luna, the analogue of terrestrial reservoirs, has nearly halved in the past 24 hours. It was last traded at $32.

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Adding to the problems of floor holders, Binance, the largest crypto exchange by market volume, Tuesday said It is temporarily suspending withdrawals for both the ground floor tanks and Luna “due to the high volume of outstanding withdrawal transactions,” citing network congestion.

The company said it will resume token withdrawals once the network is stable.

“I think the market is expecting some forced selling here from Terra and the reserve,” Nick Carter, co-founder of Coin Metrics, told CNBC. “It is a disaster but it is very predictable. No computational stablecoin has ever succeeded and this is no exception.”

He added that the problem with underground tanks is that they are largely “faith-backed”.

“It’s not fully guaranteed, it’s certainly not fully backed by reserves,” he told CNBC. “It’s really backed up by the belief in the issuer effectively.”

Terraform Labs did not respond to multiple requests for comment.