The past week has been something else entirely for the crypto market. Opening social media was a nightmare but we can all agree on one thing: You couldn’t hear about the red crypto market without hearing about LUNA and UST. LUNA fell by 99% in the past 5 days and everyone wants to know why. So what’s the tea? And what does LUNA or UST have to do with the price of Bitcoin?
It all starts with a company called Terraform Labs. They operate the Terra blockchain which has 2 tokens (cryptocurrencies): LUNA, which is their native token, and UST TerraUSD, their stablecoin. For 1 UST to be created, $1 worth of LUNA must be destroyed. A fun way to look at it is: For 1 piece of good to be created, 1 piece of bad must die)
UST is a stablecoin like USDC, or USDT. It is pegged to the dollar, meaning that 1 UST = $1. There’s a system in place to make sure it’s always pegged to $1. It works like this:
If UST drops below the dollar, then people will start buying UST using their LUNA. This will drive up demand for UST and increase its price till it’s back to $1. Sounds great right? There was just one major problem with this system. If the day ever came when people wouldn’t want UST and also wouldn’t want LUNA, the system would collapse. To make sure this didn’t happen, there had to be a reason for people to hold their UST.
Let’s Talk About that Reason…
Anchor is a platform that gives people 20% return for staking their UST. That’s mad money so trust people, as soon as they buy UST, they deposit it on Anchor. As a result, 75% of the supply of UST ($14 billion) was staked on the anchor platform.
But on Saturday, deposits suddenly dropped to $3 billion. People were not staking UST anymore 🙆🏾♂️ and this caused so much panic that people started to sell their UST and LUNA. Things reached the point where LUNA fell to $0 and UST started trading at $0.14. I opened Twitter and my whole TL was like this:
Meanwhile, for some people, this was manna from heaven. Some accounts shorted LUNA while all this was going on. This means that they bet on the price of Luna reducing and made money from the crash .
What’s Bitcoin’s Business with All This?
The Luna Foundation Guard (LFG) is an organization dedicated to saving UST and LUNA in case something like this happens. Recently, they started buying a lot of Bitcoin to keep somewhere as an emergency bailout. When the crisis started, they started loaning out Bitcoin and pouring it into exchanges through market makers. These are people who make sure that there is enough BTC/UST liquidity so that people can trade them on exchanges.
Even though Bitcoin has been reacting to the stock market reductions, the giant sell orders caused by trying to save UST and LUNA with Bitcoin may have contributed to the dip in price. The good news is that Bitcoin is already slowly recovering. As for LUNA and UST, we’re monitoring the market 👀.
Will Other Stablecoins Be Like UST?
Usually when you see a stablecoin tied to the dollar, it means that for every unit of that stablecoin, there’s 1 dollar in physical currency that represents it. It could be in the form of actual money or assets like gold. This makes them more stable and maintains its tie to the dollar.
But UST doesn’t work like that. Its stability depends on demand and supply between UST and LUNA. This system was flawed from the beginning.
LUNA and UST may have affected the price of Bitcoin and the crypto market generally. The market may seem crazy right now but it always recovers even though some cryptocurrencies don’t make it. During situations like this, price drops are caused by people panicking and selling their crypto. But it doesn’t mean the whole market will crash. Here’s how a price drop happens:
Person A: The price of this crypto looks like it will reduce soon, let me sell my crypto
Person B: I heard person B sell their crypto, let me sell mine
Person C: The price has dropped because person A and B sold, let me also sell so I don’t lose money..
And that’s how people keep selling and the price keeps reducing until someone says: l’Il buy crypto now that the price is low. And people start buying again until the price is back up.
That’s how it goes in crypto. Recovery comes after the bad days as long as you’re not holding an extremely volatile coin.