June 22, 2022

CryptoCoinex

Crypto News and Signals

Why Luna Crypto Crashed?

3 min read

The Luna crypto crash of last week saw the Terra Luna crypto plummeting to an all-new low, crashing hard in terms of pricing, with its stablecoin, TerraUSD (UST) losing its peg.

At the time of publication, the price of Luna has fallen 99.9% and currently sits at $0.00024. UST is down 85% at $0.14. With this crash has come talk of a Luna delisting, too.

So, while a Luna recovery plan is in the works and even talks of a Luna fork, what compelled the Luna and TerraUSD prices to first plummet?

What Happened To Terra Luna?

The Luna crypto crash comes from its link to TerraUSD (UST), the algorithmic stablecoin of the Terra ecosystem

UST is an algorithmic stablecoin and is operated via computer codes that help maintain its price equilibrium. The process involves burning or minting LUNA/UST to maintain the price of these tokens.

When a UST is minted, $1 of Luna is burned, while this also happens the other way around for Luna minting and UST burning. As UST threatens to go below its peg, holders will sell their UST (or burn it) for $1 of Luna, making a slight profit. This is until UST rises above $1, when the opposite encouragement happens.

After a large amount of UST was dumped, the stablecoin started to depeg. More UST was sold in a mass panic, minting more Luna and increasing the Luna circulating supply. This had the knock-on effect of then crashing the price of Luna.

This circulating supply inflation has drastically increased since the crash. Previously, the circulating supply sat at around 345 million Luna. On May 12, it was 3.47 billion Luna, according to analytics data. As of May 13, it was now 6.5 trillion Luna, where it remained ever since.

The Luna Foundation Guard (LFG) had been purchasing Bitcoin to save UST from depegging. However, the practice did not work amidst the gradual crypto meltdown.

Alongside these issues, several crypto exchanges such as Binance have delisted Luna and UST pairings. Trading suspensions were also prevalent in the lead-up to the weekend.

Luna’s Do Kwon published a recovery plan for Luna, which seemed to have a temporary effect on the overall sentiment. Luna briefly rose to $4.46, before dropping below the $1 mark once again. It has since plummeted below 1 cent.

However, going into May 16, Luna has seen a gradual price increase from its low of $0.0000009 to $0.0002. It is down 18.5% in 24 hours – a somewhat stable day compared to the crashes of 99%. Similarly, its market cap has returned to the billions of dollars, after dropping to a low of $58 million.

At the time of publication, Luna is the 49th largest cryptocurrency by market cap – previously dropping out of the top 1000.

Luna Impact On Crypto Market

The Terra Luna crash seems to be both a symptom and instigator of some of these major cryptocurrency price drops.

After The Luna Foundation Guard and Do Kwon purchased around $3 billion worth of BTC, the success of the Terra ecosystem became more linked to the wider cryptocurrency market through Bitcoin.

With the LFG and other market makers having to sell these Bitcoin reserves in an attempt to stop the UST depegging, this had a ripple effect on the wider market, seeing Bitcoin drop below the $30,000 mark.

However, the crypto market now appears to be bouncing back, with Bitcoin returning to the $30,000 price and Ethereum returning above $2000. Nevertheless, the cryptocurrency community remains shaken by the collapse of UST and Luna, adding to an already uncertain period.

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