The Luna Crypto Meltdown Has Wiped Out The Investments Of Thousands Of Investors, Raising Concerns About The Sector
Fear and anxiety have descended onto the formerly thriving and daring cryptocurrency industry. Luna and its stablecoin TerraUSD plunged more than 99 per cent in 72 hours, raising concerns about the crypto sector’s volatility.
Following the meltdown, investors flooded Twitter and Reddit with postings detailing how they destroyed most of their savings in the blink of an eye. Many reported having lost tens of thousands, if not hundreds of thousands, of dollars in the crisis on Reddit, a popular forum for tiny investors to discuss their financial trading. The phone of the suicide helplines has been pinned at the top of the thread by forum moderators because some of the comments displayed such desperation.
TerraUSD, or UST, was launched in 2018 by Terraform Labs, a Singapore-based firm. It’s an algorithmic stablecoin to maintain parity with the US dollar, which means that a TerraUSD owner should always be able to swap the token for one US dollar. However, the stablecoin’s peg to the dollar was lost, and it fell to just 23 cents before recovering. The Luna token, which can be exchanged for TerraUSD and vice versa, was also hit by the crash. When an investor exchanges Luna for TerraUSD when TerraUSD is below the US dollar, they profit because they expect the cryptocurrency to return to parity. This is not the case, however. Analysts believe Bitcoin is on its way out. Luna was dealing for less than ten cents as of Thursday, down from about $100 just a few weeks ago.
Do Kwon, Terra’s founder, has attempted to defuse the situation using his vast bitcoin savings. The South Korean billionaire invested $750 million in bitcoin to keep the stablecoin at parity, but his efforts have so far failed. In a message on Twitter, Kwon attempted to calm investors’ fears. He tweeted on Wednesday, “I recognise the last 72 hours have been tremendously difficult for all of you — know that I am resolved to work with each of you to weather this crisis, and we will develop our way out of this.”
Why TerraUSD’s peg to the US dollar was lost remains a mystery. According to some experts, it was a concerted effort aimed at profiting from the stock’s decline. In this instance, $300 million in TerraUSD would have to be sold in seconds. The European Commission is considering outlawing massive stablecoin transactions, according to the website CoinDesk.
The magnitude of the catastrophe has been compared to the bankruptcy of the investment firm Lehman Brothers in 2008, which led the US government to bail out various financial institutions to prevent the entire system from collapsing.
Bitcoin has lost 20% of its valuation in the last five days due to the panic. Bitcoin is currently worth $27,700, down from $68,000 in November – a drop of more than 50% in six months. Coinbase, one of the most popular bitcoin trading sites, had its stock fall 26% on Wednesday. It has lost almost 80% of its value in the last six months. While the losses are significant, bitcoin proponents argue that the cryptocurrency has survived much bigger crises.
Although the full impact of the Luna fall is unknown, it appears to support authorities’ warnings to small investors that cryptocurrency volatility can result in catastrophic losses. US Treasury Secretary Janet Yellen used the crash to demonstrate why the financial sector should be regulated properly. She told the Senate, “I believe this highlights that this is a rapidly developing product with rapidly growing concerns.”
Following Luna’s demise, Binance creator Changpeng Zhao said on Twitter that “we need to understand the market, with a sense of care.” He wrote, “We’re in a fresh market with many advances.” “While some technologies will succeed, others will fail.”
Meanwhile, investors vented their frustrations on Reddit. “I cannot pay the bank,” one remarked after losing roughly $450,000. “I’m about to lose my house.”