Why Was Avalanche (AVAX) Down 15% Today? Is Now the Time to Buy?

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  • Avalanche (AVAX) was down as much as 15% to $27.21 today, while the broader crypto market was only down 4.5%. There was no news triggering the double-digit decline for AVAX.
  • The most likely overhang remains the 2 million AVAX that the Luna Foundation Guard (LFG) is holding in reserve to keep LUNA and UST on life support following the spectacular collapse of those two crypto projects last week.
  • On Monday, it was reported that Avalanche CEO Emin Gun Sirer said his company had lost $60 million due to the fall of LUNA/UST. However, he went on to say that he doesn't believe LPG will liquidate its AVAX holdings.

The group behind the meltdown of Terra (LUNA) and TerraUSD (UST) still holds 2 million AVAX in reserve. A potential sell off of those AVAX coins is a risk.

Holders of celebrated "Ethereum killer" Avalanche (AVAX) woke up today to see a surprising double-digit decline in the project's price on cryptocurrency exchanges. At the time of writing, CoinMarketCap showed that AVAX was down 15% to a 24-hour low of $27.21 per coin. The same website shows that the native coin of the ultrafast and low-cost Avalanche smart contract blockchain was down more than 62% since its 30-day high of $73.09 on April 25, 2022.

The most likely reason for the bulk of that decline is the continuing uncertainty surrounding the struggling tandem projects of Terra (LUNA) and TerraUSD (UST). AVAX is connected to those two projects run by the Luna Foundation Guard (LFG) because the LFG had bought nearly 2 million AVAX coins worth $100 million to hold in reserve as backstop assets. As recently as May 5, AVAX made up 77% of the total LFG reserve fund, representing its top holding.

However, because of the combined crypto contagion last week of the UST stablecoin depegging from the value of the U.S. dollar, and LUNA's automated attempt to stabilize its companion stablecoin project by flooding the market, the broader crypto sector was hit hard. But the LFG reserve currencies seem to have been hit hardest.

Last week LPG liquidated its total holdings of Bitcoin (BTC) worth $3 billion to help recalibrate UST. While it was down significantly then, BTC has bounced back and is mirroring the overall crypto market now that it's no longer a de facto reserve currency for LUNA/UST. That doesn't seem to be the case for AVAX right now.

Today the Foundation shows that it still holds the same number of AVAX coins -- it didn't sell a single one -- but due to the precipitous price decline, AVAX is now only 27% of the total LUNA/UST reserve portfolio. That could be a contributor for today's AVAX decline, when combined with a lousy looking technical chart that signals the potential for a further bearish downturn for Avalanche.

Avalanche CEO says they lost $60 million from collapse

In a crypto trade publication yesterday, Avalanche CEO Emin Gun Sirer said that because of the LUNA/UST crash, his company lost $60 million during the past week. However, he also stated that he's supportive of the work done by the Luna Foundation and believes that the AVAX reserve will likely have a stabilizing effect.

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"We talked to Terra and they didn't sell AVAX even when they needed to and so it's currently the most valuable thing they hold…many percent of AVAX is actually locked, so they can't really move it," as Sirer was quoted in the report. "Algorithmic stablecoins have two extremes. We know the risks and we think: These people know how to manage it, their team is active and competent…this partnership can actually be quite profitable for us. And I will do it again."

Is AVAX a buy?

At this point, AVAX is trading at a more than 80% discount from its peak price of $146.22 logged last November, according to CoinMarketCap. It is a solid project with hundreds of developers continuing to build smart contract apps on its fast and scalable blockchain. This is not financial advice and investors should always do their own research and weigh their own investment risk, but the underlying fundamentals of this project are sound. When greater clarity surfaces regarding the future of LUNA/UST and short-term risk to AVAX, this alternative to Ethereum is priced at a very attractive entry point.

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