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Cryptocurrencies crater as Terra collapses with Luna losing over 99% of its value

NEW YORK (BLOOMBERG) – Cryptocurrencies extended their slide on Thursday (May 12) after a brief attempt at recovery, as the collapse of the TerraUSD stablecoin triggered a stampede out of many of the digital asset market’s most popular tokens.

The company behind TerraUSD, Terraform Labs, was set up in Singapore in April 2018.

TerraUSD, or UST, which lost its US dollar peg, crashed to 20 US cents on Wednesday, taking its market value down from US$18.4 billion (S$25.7 billion) to US$5 billion. It was trading at 70 US cents at 12.10pm Singapore time on Thursday.

UST-affiliated token Luna plunged by about 95 per cent on Wednesday and continued sliding on Thursday. It was trading at 41 US cents, 99.7 per cent below its all-time high of US$119.18 hit last month.

Bitcoin, the world’s largest cryptocurrency dropped as low as US$26,970 to stand at its lowest since Dec 28, 2020. In the last eight sessions, it has lost a third of its value, or US$13,000.

Tokens like Avalanche and Solana, which underpin some key decentralized finance (DeFi) protocols like TerraUSD, also extended their declines. Earlier, they had posted double-digit percentage gains but the rally fizzled.

“UST’s collapse undercuts confidence in all liquidity protocols,” said Mr Aaron Brown, a crypto investor who writes for Bloomberg Opinion.

“If UST can fail, maybe Aave can too. Sort of like when (investment bank) Bear Stearns failed, it focused people’s attention on whether Lehman would fail.”

Backers of TerraUSD coin are reportedly struggling to win investor support for a rescue by raising about US$1.5 billion to shore up the token after it crashed from its US dollar peg. Talks stalled after big-name firms were approached by various individuals with connections to Terraform Labs in recent days, according to sources.

Terraform Labs co-founder and chief executive Do Kwon repeatedly alluded on Twitter to recovery efforts, saying on May 10 that he was “getting close” and encouraging his followers to “stay strong”. Mr Kwon did not respond to a request for comment.

“Is the market getting spooked by what is happening with Terra? The answer is yes,” said Mr Craig Johnson, chief market technician at Piper Sandler. “Money market funds are important to investors and right now, we are questioning the third-largest money market fund in crypto land. People did not think we were going to break the buck on that and that has clearly happened.”

Technicians say Bitcoin now needs to hold at US$28,000 – a break below that level could start a new wave of selling.

TerraUSD’s troubles have been the dominant story in finance all week.

“The breaking of an inadequately robust or collateralised protocol is destroying value,” said Mr Hugo Rogers, chief investment officer at Deltec Bank & Trust. “And this is having knock-on effects.”

Sentiment was also crushed after data showed that United States consumer prices rose by more than forecast in April, indicating that inflation will persist at elevated levels for longer. The data point also suggests that the Federal Reserve will stay on its path of aggressive interest rate hikes, creating an unfavorable environment for cryptos and other risk assets.

“There is extreme fear across the crypto market,” said Mr Marcus Sotiriou, an analyst at British-based digital-asset broker GlobalBlock.

The area around US$30,000 had been an “especially sensitive zone” for Bitcoin, wrote Mr James Malcolm, head of foreign exchange and crypto research at UBS.

That is where mining economics turn negative, “which could potentially lead to increased coin sales by this key cohort”, he said.

“Below this, there is little technical support until the low-20ks, where margin calls kick in,” he added

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