Why did $LUNA & $UST prices fell drastically?

The entire cryptocurrency market is in a state of panic. Almost all cryptocurrencies have plunged by 30-50 percent in the last seven days. People have lost their savings in barely a week, and many are devastated.

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#Lunacrash is trending on Twitter, and $LUNA has hit an all time low. $LUNA is presently trading at $0.00004, representing a drop of approximately 99 percent from it's all-time high of $82 on May 6, 2022. Are you wondering what caused $LUNA and $UST to plummet so abruptly? Let us analyze all of the causes of the market meltdown.

Why Did $LUNA Crash?

To understand why $LUNA crashed you should first know about Terra Labs which is a blockchains development company that has the Terra network over which $LUNA and $UST are hosted. Although both these cryptocurrencies are of the same network, they have different functions as $UST is supposed to be a stablecoin and $LUNA is a market-dependent coin.

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As $UST is a stablecoin, it is pegged to $LUNA with algorithmic pegging which is basically a smart contract that adjusts the price of the coins automatically. What this does is that, you can redeem or mint 1 $UST for 1 $LUNA.

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Now the reason why $LUNA's price crashed is that the price of $UST began dropping from its $1 peg. When the price of $UST started going down, a large amount of $LUNA tokens were minted to make $UST stable. 

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But this led to a surplus of $LUNA in the market which made the price go down. When its price started going down, the traders started selling the $LUNA token which made the price plummet even more.

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That is the reason why $LUNA went from the top 10 cryptocurrencies list to not even being in the top 150. More than a billion $LUNA tokens are present in the market currently whereas before the number was less than 350 millions. 

How $UST Got De-pegged?

As previously stated, $UST is an algorithmically stable coin. It is pegged to the US dollar, and the collateral is in the form of $LUNA tokens. The Terra protocol incentivizes users to burn LUNA tokens and mint UST when the UST exceeds $1. The protocol's incentives are reversed when the UST goes below $1. As a result, the value of $UST is always kept constant at $1.

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However, algorithmic stable currencies are not as proven or established as fiat-based stable coins such as USDT. The $UST is managed via a smart contract algorithm that can be terminated under extremely volatile market conditions.

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There are several staking options for $UST that offer a good APY. However, $14 billion of the $18 billion $UST in circulation were centered on the Anchor staking protocol. The protocol provided a 20% return on the staked $UST, resulting in a huge number of tokens being kept on a single platform.

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An anonymous whale sold $285 million worth of UST in the second week of May 2022. This massive volume knocked UST off its $1 peg, and its value plummeted below $1. In order to return the value of $UST to $1, an increasing number of LUNA tokens were minted.

Why $UST Is So Important For $LUNA?

The Terra project contains two cryptocurrencies, $UST and $LUNA, each of which serves a specific purpose. $UST is a stablecoin used for staking, while $LUNA is the project's tradable token.

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However, it is understandable to wonder how the depegging of $UST had such a negative impact on LUNA. $UST and the LUNA token are inextricably linked. Stable coin adoption is vital to Terra's ecosystem's survival. The pair's algorithm is constructed in such a way that it will make LUNA deflationary in the long run.

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On the other hand, the same algorithm risks losing its $1 peg during periods of significant market volatility. As a result, major changes in one cryptocurrency will always have an impact on the other.

Conspiracy Theory

Now that you know how or why the prices of $LUNA and $UST fell so drastically, it’s time that we tell you about a conspiracy theory that has been going around that involves Blackrock and Citadel. It’s being said that they anticipated the drop in the asset value of Terra and hence borrowed 100k BTC from Gemini.

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They swapped 25k of those borrowed BTC into UST and then called Do Kwon at the Terrsa Foundation and made a deal of selling BTC for UST. It’s said that they played it smart and sold a huge block of BTC for a discounted price of UST to not disturb the market. 

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The conspiracy theorists say that Do Kwan accepted this offer and that led to a lowered liquidity of UST. After this happened, Blackrock and Citadel dumped all the BTC and UST assets they possessed which led to people selling them all at a fast rate. 

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Anchor holds a huge amount of $LUNA and Blackrock knew that this crash would lead to a lot of withdrawals that Anchor would not be able to repay. Anchor is a Ponzi scheme and they offer 20% APY for Christsake. Hence, all of this would eventually lead to the $UST going below its $1 peg.

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Blackrock and Citadel would benefit from all of this as they could buy the BTC tokens back with a lower price and pay their borrowed money back. If this was truly done by them, then it was a brilliant strategy to break the market. However, there is no confirmation about any of this except the borrowing of 100k BTC by Blackrock and Citadel.

Current Status Of $LUNA and $UST

As of 13 May 2022, $LUNA is trading at $0.00004 and $UST at $0.1767. Both the tokens are still on the falling edge since the past 24 hours. 

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Major crypto exchanges like Crypto.com have halted the trading whereas Binance have already terminated withdrawal of these tokens. Considering the current status of LUNA, Binance has delisted LUNA/USDT and LUNA/BTC pairs from its spot and futures. 

Conclusion

So we explained why the price of $LUNA went down to less than $0.00004 while once it had been over $119.18 just over a month ago. Terra had been looking to resolve the instability of $UST before the massive price drop happened and are planning to raise funds for their recovery. They have promised that they will come back but some investors are already having doubts.

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Regardless of that, we hope the market will right itself soon. Even though it is very unstable these days, you should not lose hope as the fall of LUNA is temporary. The market will recover once the $UST gets back to $1. So till then, keep your fingers crossed!

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