7 Things to Know Before You Buy Terra (LUNA)

by Lyle Daly | Published on Aug. 14, 2021

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Terra is gaining popularity quickly. Here's what first-time buyers should know.

Started in 2018 and based in South Korea, Terra is a protocol for creating cryptocurrencies with stable prices. Its native token, Terra (LUNA), has grown in value as the project has gotten more successful.

Terra already has millions of users and several ambitious projects it's working on. If you're thinking of investing in Terra, these are the key things you need to know.

1. The Terra protocol offers multiple stablecoins tied to different currencies

Terra's main focus is stablecoins, which are cryptocurrencies pegged to another asset. There are already quite a few stablecoins, most of which are pegged to the U.S. dollar. Terra offers one of those in TerraUSD (UST), but it also has stablecoins pegged to many other currencies, including the South Korean won, the Euro, and the Mongolian tugrig.

Since stablecoins generally maintain the same price, they have a better shot of catching on as a way to transfer funds and to buy goods and services. Most cryptos are volatile, which limits their uses. People who buy them tend to hold onto them, hoping the price will go up. Businesses are wary of accepting them because the price could also go down. Neither scenario is an issue with stablecoins.

2. Terra Luna tokens help balance out its stablecoin's prices

Luna tokens are Terra's way of keeping its stablecoin prices where they should be. It incentivizes trading between Luna and stablecoins when it needs to increase or reduce the stablecoin supply.

Here's a hypothetical example -- UST, Terra's U.S. dollar stablecoin, is in demand. That has raised the price to $1.05 when it should be $1. To counteract this, Terra needs to add more UST tokens to the supply.

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Terra then lets its Luna token holders convert Luna to UST, with each $1 of Luna being worth 1 UST. After the token holders do that, theys can sell the UST at the higher price of $1.05, making a 5% profit on however much Luna they converted.

It works like this with all of Terra's stablecoins. And in periods of low demand, Terra lets its stablecoin holders convert to Luna at a profit. That reduces the stablecoin supply, and pushes the price back up.

3. Luna tokens are also used for staking and governance of the project

Luna token holders can stake their tokens. When you stake Luna, you pledge those tokens to the network, and they're used to verify transactions. There's no risk in doing this. You can always unstake your tokens (unstaking can take up to 21 days). If you stake Luna, you receive a cut of the transaction fees Terra collects on the use of its stablecoins.

Token holders also have a say in the future of Terra. Because Luna is a governance token, holders have voting rights in the project.

So far, Terra has had most of its success in its home country of South Korea. According to a Terra video from May 2021, its stablecoin pegged to the South Korean won is used by over 2 million people per year for over $1 billion in spending. That video reported that Terra's stablecoin pegged to the Mongolian tugrig was used by 40,000 people monthly.

To Terra's credit, it already has a customer base. There's no guarantee that it will successfully expand to the United States, but as we'll get to now, it's providing a big incentive to buy its U.S. dollar stablecoin.

5. Terra is offering 20% interest on UST

On March 17, 2021, Terra launched a savings and lending protocol called Anchor. This protocol allows users to deposit stablecoins and earn interest on them. On UST deposits, the annual interest rate is about 20%.

Since UST is a stablecoin that normally has a value of $1, being able to earn 20% interest on it is enticing. It is worth noting that the interest rate could change in the future, and even stablecoins aren't as secure as money stored in savings accounts.

The high interest rate could help expand UST's user base. If it does, that will likely be good for the price of Terra's Luna token.

6. The Terra blockchain ranks in the top five in terms of revenue

The Luna cryptocurrency hasn't quite broken into the top 20 by market cap. But the Terra blockchain is already one of the biggest. Revenue numbers from Token Terminal have Terra in the top five. It's behind Ethereum (ETH), the Binance Smart Chain, and Bitcoin, and neck and neck with Polygon (MATIC).

That's a good sign for Terra fans. While many cryptocurrency projects aren't in use yet, Terra is one of the biggest moneymakers.

7. Buying it can be a challenge

The trickiest part of buying Terra's Luna token is finding an exchange that lists it. Most of the top cryptocurrency exchanges don't. Here are a few platforms where you can buy or trade for Luna:

Terra has picked up plenty of momentum in 2021, and it has the potential to keep growing. You should still be prepared for volatility and the possibility of losing money with it, as cryptocurrencies are high risk. But if you like what Terra offers, then it's worth adding to your portfolio.

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