- TerraUSD hit a low of $0.30 Wednesday as the supposed stablecoin slid further away from its peg after confidence confirmed.
- Sister cryptocurrency luna tumbled more than 97% rescue efforts from Terraform Labs appeared to fail.
- Analysts labeled the drops a “death spiral” and questioned whether confidence would ever return to the Terra project.
TerraUSD, the major stablecoin which is supposed to be fixed at $1, has been released on Wednesday to as low as $0.30 as confidence in the crypto project.
Its sister cryptocurrency luna dropped more than 97% as rescue efforts failed to avert what analysts have called a “death spiral” that has shocked digital-asset investors.
UST had tumbled to $0.375 Wednesday as of 9.31 am ET, according to Coingecko, having earlier dropped as low as $0.306.
Luna, which is free-floating, was down 97% to $0.869. It traded as high as $116 in April.
The dramatic drop in TerraUSD and luna is a “death spiral” that could see confidence in the stablecoin evaporate entirely, analysts at research house Fundstrat said in a note.
TerraUSD was the world’s third-biggest stablecoin before its dramatic “de-peg” from the dollar in recent days.
Stablecoins are cryptocurrencies that are designed to trade at $1 per token, giving traders a supposedly stable place to park their cash while they trade.
TerraUSD works slightly differently from tether and Circle’s USD Coin, the two biggest stablecoins, which are both backed by liquid assets. Instead, it relies on its ties to cryptocurrency luna to maintain its value.
Investors can exchange one unit of TerraUSD for $1 of luna. If the price of TerraUSD slips below $1, investors are encouraged to buy TerraUSD so they can exchange it for luna and make a small profit, and vice versa when the price moves above $1. This so-called arbitrage is supposed to push TerraUSD’s price back to $1.
But the system has broken down in recent days as cracks have started to show in crypto assets during a period of heavy selling in financial markets.
“The exact reason UST became untethered from the dollar remains unclear, but on Saturday, hundreds of millions of dollars worth of both UST and luna were rapidly sold across exchanges, pushing UST to around 98 cents,” analysts at Coinbase said in a note. They added that soon “panic set in.”
Do Kwon, the co-founder of Terraform Labs, the group behind UST, scrambled to put together rescue plans on Wednesday but they appeared to have little effect on the assets’ prices.
He issued $1.5 billion of loans in UST and bitcoin Tuesday to try to encourage arbitrage investors to boost the cryptocurrencies.
Bryn Solomon of crypto trading firm Mgnr.io said: “At this stage, I don’t think these firms will have the risk appetite to support it. Algorithmic stables are a confidence game. Once confidence is lost, it’s game over.”
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