Oversimplified: Terra, Luna Crash Takeaways

| Updated: May 25, 2022 4:02 pm

For those who do not know much about cryptocurrencies, the crypto market underwent a huge setback in mid-May with the collapse of stablecoin TerraUSD and its sister coin Luna.

As the name suggests, stablecoins are to remain stable. These are pegged to fiat currency (government-issued currency that is not backed by a commodity such as gold) like Dollar or the Euro. TerraUSD has been pegged almost exactly to the dollar since its release, but on May 9 it crashed, and it is now worth just over $0.11 (€0.10). Its sister coin Luna was worth more than $80 (€76) a coin at the start of May, and as of 18 May it was worth a fraction of a cent.

The crash of these two coins has been compared to a mini 2008 financial crisis within the crypto eco-system, with their collapse having a knock-on effect on other digital coins and projects, wiping billions of dollars off the market.

The most high-profile stablecoin is Tether, of which there is around $75 billion (€71.22 billion) in circulation. This makes it the third biggest cryptocurrency behind Bitcoin and Ethereum. Tether is pegged to the dollar, meaning its value is supposed to remain stable at $1. This provides cryptocurrency investors with a way to exchange cryptocurrencies, such as Bitcoin and Ethereum, on exchanges, without converting the money to regulated fiat currency.

However, with the Terra Luna crash, serious doubts are being raised on the viability of the crypto ecosystem. As explained by Joe Downie, chief marketing officer at cryptocurrency platform NiceHash: “Terra was never really a stablecoin from the start. It was an attempt to make something that appeared stable, that tried to be pegged to the dollar as much as possible, but by being backed by their own currency instead of US dollars, it was a recipe for disaster essentially,” he said.

As for whether investors can trust if stablecoins are really stable, Downie repeats a key mantra in the cryptocurrency community: Do your own research. “A lot of people do invest based on hype in the crypto markets, it’s easy to hype something up, hype is just marketing, but a lot of that is masking the fundamentals underneath it,” he said.

“Check the technological fundamentals of what it is. If you’re in crypto and you’re investing a bit here and there, you should have an idea of what’s a bit more solid and what’s not”.

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