You've heard of falling stars. Now we have a falling moon -- at least in the crypto world.
Over the past several days, the price of Terra (LUNC 0.13%) crashed. The digital token lost nearly all of its value.
The panic also boiled over into other cryptocurrencies. Shiba Inu (SHIB -0.18%) fell nearly 50% at one point over the last week or so and remains down nearly 30%. But the worst could be over for the meme coin. Here's why Shiba Inu won't be the next Terra (Luna).
Image source: Getty Images.
Anatomy of a crypto crash
What caused the latest crypto crash? You can blame it on the underlying structure of the Terra blockchain.
The Terra ecosystem has two cryptocurrencies -- Terra (Luna) and TerraUSD (USTC -0.10%). The latter is a stablecoin pegged to the U.S. dollar. Some stablecoins, such as USD Coin, are backed by cash reserves or cash equivalents. TerraUSD, though, uses an algorithm to maintain a stable price.
The algorithm behind TerraUSD attempts to automatically adjust the price by minting or burning the stablecoin or its sister token Luna. This process typically works pretty well. However, its Achilles' heel is an inability to handle extreme price volatility.
Several days ago, TerraUSD lost its peg to the U.S. dollar. This led to panic selling of the stablecoin, resulting in a downward spiral for both TerraUSD and Luna. The algorithmic software couldn't maintain stability with the plunging prices.
This sell-off spooked holders of other cryptocurrencies as well. When all was said and done, nearly every cryptocurrency on the market was down significantly. The only exceptions were stablecoins that are backed by fiat currencies.
Will Shiba Inu be next?
The Terra meltdown could understandably cause investors to wonder if Shiba Inu might be next. There's an easy answer, at least for now: No. Shiba Inu isn't currently linked with any stablecoin available for trading.
However, there is a Shiba Inu stablecoin in development. Lead Shiba Inu developer Shytoshi Kusama recently revealed in an online post on Medium that the stablecoin project "is nearing completion."
One key difference between the Shiba Inu stablecoin (referred to as SHI) and TerraUSD is that it will be pegged to $0.01 rather than $1. Shiba Inu's founder believes that this will make the stablecoin even more stable.
SHI will be an algorithmic stablecoin. However, it's unknown at this point whether or not how the algorithm will attempt to maintain its peg to the $0.01.
After the Terra debacle, Shiba Inu holders would be unlikely to support a stablecoin that held the potential to bring down SHIB. It also seems reasonable to conclude that the SHI developers wouldn't adopt a similar approach used with TerraUSD's algorithm.
An important takeaway
Shiba Inu won't meet a similar fate as Terra anytime soon -- and maybe never will. However, there's an important takeaway from the recent crypto crash caused by Terra that Shiba Inu investors should take to heart.
The reality is that Shiba Inu's fortunes are connected to the broader cryptocurrency market. If investors sour on cryptocurrencies, in general, the prospects of Shiba Inu moving significantly higher are slim to none. On the other hand, if cryptocurrencies return to favor as an asset class that investors like, Shiba Inu has a good chance of doing so as well.
Shiba Inu isn't pegged to the U.S. dollar. But it is pegged to the status of the crypto market.
