Cryptocurrency luna crashes to $0 as UST falls from peg; bitcoin rises
Bitcoin staged a rebound on Friday, jumping above $30,000 despite the ongoing woes of stablecoin TerraUSD which has caused panic in the crypto market.
The world’s largest cryptocurrency bitcoin was trading at around $30,262.85 at 4 a.m. ET on Friday, according to CoinGecko data, up 8% in the last 24 hours after it dropped to levels not seen since late 2020 earlier this week.
However, the digital currency is still down 16% in the last seven days.
The recent crypto meltdown, which has seen billions of dollars wiped off the market, has in large part been sparked by the crash of a controversial stablecoin known as TerraUSD or UST, which is supposed to be pegged one-to-one with the U.S. dollar.
UST has however lost its peg and on Friday was trading at around 14 cents, according to data from CoinGecko.
Luna, a token closely associated with UST, is now worth $0 as a result.
UST and luna are linked. UST is dubbed an algorithmic stablecoin meaning its $1 peg is supposed to be governed by underlying code. That is fundamentally different to other stablecoins like tether and USDC which are backed by real-world assets such as bonds. UST has no real-world reserves.
The UST algorithm works through a complex system of minting and burning tokens to maintain price stability. A UST token is created by destroying some of the related cryptocurrency luna to maintain the dollar peg.
But the extreme market volatility has put UST to the test and it has been unable to maintain the peg.
Adding further complications is the fact that the Terra blockchain which underpins UST and luna stopped processing transactions twice in the less than 24 hours.
On top of the UST saga, crypto markets have been hit by a number of other headwinds including higher inflation and interest rate hikes that have caused a sell-off in global stock markets which has filtered through. The price movements of cryptocurrencies have been correlated to stock markets.
“The Luna/UST situation has hit market confidence quite badly. Overall most cryptocurrencies are down [more than] 50%. Combining this with global inflation and growth fears, does not bode well in general for crypto,” said Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.
Even the big bitcoin rebound may not be sustainable.
“In such markets, its normal to see bounces amounting to 10-30%. These are normally bear market bounces, testing previous support levels as resistance,” Ayyar said.