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Why Terra's Luna Was on Fire in More Ways Than 1 Today

By Jon Quast – Oct 22, 2021 at 11:31AM

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Supply is about to go down, and there's good reason to believe investor demand is about to go much higher.

What happened

Cryptocurrency network Terra has tokens called Luna (LUNC 0.09%), and these were on fire on Friday. According to CoinMarketCap.com, Luna tokens were up 8% over the previous 24 hours at 10:45 a.m. EDT. And the reason the price of Luna tokens was on fire is that 10% are about to be set on fire. 

So what

Cryptocurrencies have a finite supply of tokens, dictated by the blockchain protocols. However, networks can choose to remove tokens from the supply, a process called "burning." And back in March, a Terra developer proposed burning some of Luna's supply. It's a proposal that eventually passed and is expected to be enacted next week.

An investor looks at a chart displayed on a computer while taking notes.

Image source: Getty Images.

Luna tokens are being burned in order to increase the supply of Terra's stablecoin TerraUSD (USTC -1.87%). Stablecoins aren't volatile like regular cryptocurrencies because they're supposed to be backed by assets. In this case, TerraUSD is backed by Luna. Therefore, in order to increase the supply of TerraUSD, Luna tokens have to be burned.

Now what

In my opinion, cryptocurrency prices are a simple case of supply and demand. The supply of Luna tokens is set to decrease, but that's only half of the equation. Here's why demand could be growing for this cryptocurrency: People who hold cryptocurrencies can generate income by staking their coins for network use. The rate of returns varies from situation to situation. But according to Crypto Briefing, the current return on staking Luna tokens is a little over 3%.

However, with the upcoming burn, returns on staking Luna could jump to 15%. Those are stellar returns and something that could be causing investors to pile into Luna today. So supply is set to decrease and demand might be increasing. That combination accounts for the increase in price today.

Finally, if the majority of investors are buying Luna tokens to stake them, this could reduce Luna's volatility going forward. Consider that when you stake, you're not trading. This is an interesting dynamic for this hot cryptocurrency

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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