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Stablecoin Terra’s Broken Dollar Peg Hits Wider Crypto Markets

Jimmy Khan

May 11, 2022 10:30

One of the world's major stablecoins, TerraUSD, dropped a third of its value on Tuesday, causing concern among cryptocurrency investors and contributing to bitcoin's first drop below $30,000 in ten months.

Stablecoins are digital currencies that are linked to conventional assets like the US dollar. They are often used by traders to transfer cash around and speculate on other cryptocurrencies, and they are popular as safe havens in times of crypto market turbulence.

TerraUSD, often known as 'UST,' is an algorithmic stablecoin and one of the most valuable in terms of market capitalization. According to pricing tracker CoinGecko, it shattered its 1:1 peg to the dollar on Tuesday and plunged as low as 67 cents.

TerraUSD gained notoriety earlier this year when the non-profit Luna Foundation Guard, a subsidiary of Terraform Labs, the business behind it, committed to gather $10 billion in bitcoin to sustain its dollar peg.

According to CoinGecko, TerraUSD had recovered marginally to 91 cents by Tuesday afternoon and was the world's 10th biggest cryptocurrency by market value.

Unlike other stablecoins that utilize conventional assets as reserves, TerraUSD maintains its peg with a complicated algorithm that moderates supply and demand through the usage of Luna, another balance token.

Luna Foundation Guard claimed in a tweet on Monday that it will protect TerraUSD's dollar peg by lending $1.5 billion in bitcoin and TerraUSD to over-the-counter trading businesses.

Terraform Labs and Luna Foundation Guard could not be contacted for comment.

The usage of bitcoin as a reserve has produced a vicious cycle for TerraUSD, according to Justin d'Anethan institutional, sales director at Amber Group, with sell-offs in both tokens pulling the other down.

"Bitcoin is falling because it's being sold to protect an ecosystem that's suffering; the ecosystem's suffering is causing even more fear on (TerraUSD), which is leaning on the Luna token, requiring the foundation to supplement and defend the peg with additional reserves," he continued.

"It's not a pleasant scenario."

The Federal Reserve of the United States cautioned on Tuesday in its biannual Financial Stability Report that stablecoins are susceptible to investor runs because they are backed by assets that might lose value or become illiquid in times of market stress.

"Additionally, the growing usage of stablecoins to fulfill margin requirements for leveraged trading in other cryptocurrencies may magnify volatility in stablecoin demand and raise redemption risks," it warned.


Stablecoins have profited from market volatility in the crypto markets in general. TerraUSD is currently rated eleventh among the top ten cryptocurrencies by market capitalization.

Other prominent stablecoins, like as Tether and USDC, claim to be backed by actual assets and so immune to the issues plaguing TerraUSD.

However, the larger cryptocurrency sector has suffered as conventional financial markets have declined.

Bitcoin dipped below $30,000 for the first time since July 2021 early Tuesday, lagging behind other typical "risk off" assets like tech stocks but also pulled down by the TerraUSD sell-down.

According to Coingecko, the world's most commonly held cryptocurrency had also recovered marginally by Tuesday afternoon, reaching $31,272.

These declines, which coincide with a drop in risk appetite, contradict some crypto fans' belief that cryptocurrencies are a store of value similar to gold.

Since hitting an all-time high of $69,000 in November 2021, Bitcoin has lost more than half of its value.

While bitcoin is now holding at a crucial support level, analysts at Singapore's QCP Capital wrote in a note that "there is considerable tail risk from the (TerraUSD) de-peg together with macro worries."