Cryptocurrency prices: why did Luna crash so much?
After enjoying a hugely profitable 2020 and 2021, cryptocurrency investors felt a harsh backlash this year as a number of widely held coins fell in value.
Last week we witnessed perhaps the steepest drop of all when the value of Luna Cryptocurrency went from a combined $20 billion to nearly zero in just a few days. At one point, the coin was listed at $0.00 on Binance, the world’s most widely used cryptocurrency exchange.
His losses have scared off other investorsspreading over the larger pieces. Bitcoin lost 17% of its value in five daysand the price of Ethereum fell by 23%.
How does Luna work?
Ironically, given the extreme volatility of the past week, Luna, or Terra Luna to give her full name, is meant to be a ‘stablecoin‘. Unlike most cryptocurrencies, the value of stablecoins is tied to another asset to avoid sudden price fluctuations.
They can be linked to traditional financial networks through bonds or real currencies like the dollar to anchor them at a certain price. In the case of Luna, its value is tied to Terra USD which uses complex mechanisms to keep its value tied to the US dollar.
Luna’s price can fluctuate, but if its value against the dollar changes too much, investors will simply convert it to the more valuable currency, which will serve to level the values.
Why has Luna’s price dropped so much?
The catastrophic drop in Luna values came when TerraUSD, the currency essentially guaranteeing a stable price, was rapidly devalued.
TerraUSD was closely tied to Anchor Protocol, essentially a savings account for the currency who was paying an interest rate of 20%. This made holding TerraUSD a very popular investment and one that seemed to guarantee very solid returns.
Yet in March Announced anchor that it replaced the 20% rate with a variable rate, which was supposed to be much less generous. This led to a mass exodus from Anchor, prompting more holders to sell both their TerraUSD and the closely related coin Luna.
With a large number of people trying to empty their Terra USD and Luna simultaneously the mechanism to guarantee stable rates has simply ceased to function.
On Friday, May 13, the price of Luna had fallen below 1 cent while TerraUSD, believed to be worth a dollar, crashed to $0.14.
Write about Twitter Do Kwon, creator of TerraUSD and Terra Luna, assured investors: “I understand that the last 72 hours have been extremely difficult for all of you – know that I am committed to working with each of you to get through this crisis, and we will build our way out of it.