What happened
Most investors have seen just how brutal the cryptocurrency market has been of late. However, for investors in algorithmic stablecoin Terra (LUNC 6.17%), it's been quasi apocalyptic of late.
As of 9 a.m. ET today, Terra has plunged 43.6% over the past 24 hours. This comes as Terra's stablecoin, TerraUSD (USTC 3.39%), sunk to the $0.93 level, representing a 7% fall from its peg over the past 24 hours.
At the time of writing, Terra has fallen below the $35 level for the first time in six months, sparking what could be one of the most impressive sell-offs among large-cap tokens we've seen this year. This rapid decline has pushed LUNA out of the top 10 list of tokens by market capitalization, with LUNA's market cap now below $12.5 billion.
Image source: Getty Images.
So what
For investors who may not be aware of Terra's model as an algorithmic stablecoin, LUNA tokens act as the reserve currency supporting the network's UST token. Besides some Bitcoin and other digital assets backing this stablecoin, Terra maintains its peg by minting and burning its native token, LUNA. In other words, the stability of UST depends a great deal on the stability of LUNA.
However, with a rapid decline in the price of LUNA, UST has fallen off its peg. While UST has clawed back much of its losses, now around $0.93 per token, it previously fell as low as $0.6841, signaling some serious trouble and concerns about a potential collapse for this key stablecoin.
The stablecoin market is very important to the proper functioning of many aspects of the crypto market. If investors lose faith in the underlying value of stablecoins, the potential for market contagion to take hold is real. Thus, many investors are watching how Terra's LUNA and UST tokens perform in this volatile environment.
Now what
Moving forward, there's increased uncertainty with respect to how the market will regain its trust in UST and other stablecoins amid this impressive sell-off. Many investors expected some sort of test for UST and other algorithmic stablecoins due to the recent volatility in the markets. However, the market consensus for how Terra was able to navigate this bout of volatility is increasingly deteriorating.
It's worth noting that UST has lost its peg in the past and regained it. However, this dramatic dip in the price of UST may shake the faith of investors in Terra for some time. How much damage is permanent versus temporary remains to be seen. However, until UST regains its peg again, these discussions are likely to continue.
Terra's Luna Foundation Guard has announced that it would loan $750 million of Bitcoin to over-the-counter firms to help protect the UST peg, as well as loan $750 million UST to buy Bitcoin in its stabilization efforts. These moves appear to be pushing UST higher and could potentially work. However, these remain tenuous times for investors considering Terra.
Personally, I think how Terra's founder Do Kwon and the Luna Foundation Guard manage this crisis will determine how this token will perform long term. This could perhaps be the most important 24 hours of Terra's existence to date. Investors will want to keep a close eye on how UST performs in the hours and days to come -- it could be a bumpy ride.
