What happened to Terra (LUNA), which some traders who rushed to buy LUNA crypto coins didn’t know, was inflation of the circulating supply.
The Terraform Labs team had to stop the Terra blockchain because of the severe inflation, but the damage had already been done. During the crash, the number of LUNA coins in circulation increased more than 18,000 times, from 350 million to 6.5 trillion.
Luna Crypto What Happened
According to the law of supply and demand, if there is 18570x more of something, it loses value per unit by that amount. Cryptocurrency has been referred to as “digital Gold” by the Winklevoss twins, the wealthy founders of Gemini Exchange. It is not extended as rare or scarce.
LUNA dropped over 99% from its all-time high of $119 to under a dollar, then 99% again to one cent, then 99% twice more to its current 2022 low of $0.00000112 against Binance USD (BUSD), one of the few trading pairs that still existed for it at that point. As a result, many cryptocurrency exchanges delisted it.
The fact that the S&P 500 and Bitcoin both fell below 4,000 on the exact day for the first time in more than a year didn’t help.
eToro.com, one of the most regulated and secure cryptocurrency exchanges for newcomers, momentarily banned LUNA trading at just under one cent, protecting customers looking to purchase LUNA crypto tokens from two of those 99% declines.
Many LUNA investors are questioning what happened to the coin that was previously one of the top 10 crypto assets by market cap. One investor even asked @terra money to “explain in football words” because it’s unclear what triggered the drop.
What is Terra LUNA
The Terra (LUNA) cryptocurrency asset’s primary goal was to make it possible to construct stablecoins for decentralised finance (Defi) applications, making what happened to LUNA different from other crypto crashes.
Without the requirement for a central bank, banking institution, or a centralised organisation like Visa, anyone in the globe could utilise it as a payments network. Instead, anyone could act as their payment processor. Defi, in the words of Goldman Sachs, “provides speedier settlements for customers” and is “easier to use for underbanked communities.”
Stablecoins were kept stable and linked 1:1 to the dollar or another local currency by allowing users to exchange stablecoin units for unstable native tokens. In South Korea, LUNA was used with a stablecoin pegged to the Won, while in Mongolia, it was used with a stablecoin tied to the Tugrik.
Algorithmic Stablecoins
Terra (ticker symbol LUNA) served as the native token for TerraUSD (ticker symbol UST), Terra Labs’ primary and biggest stablecoin with a 1:1 peg to USD.
LUNA might be used to “mint” new UST and stabilise the market for UST if the stablecoin deviated to the downside and lost its peg (less than $1). UST could be exchanged for LUNA to raise the price of UST, and vice versa, if it lost its peg and increased in value to more than $1.
The algorithm controlling this dual-token system’s mint and burn effect was automatic. The two cryptocurrencies were backed up by one another (UST is currently the 47th largest asset), and everything worked well—until it didn’t. If one fails, a chain reaction could result, and that’s what happened.
UST Loses its Peg
There is currently no official explanation for why TerraUSD (UST) lost its peg to a greater extent than usual, and there are various speculations of a coordinated attack, including the possibility that a huge institutional entity or “whale” borrowed a significant number of UST to dump on the market.
Do Kwon, CEO of Terraform Labs, attracted criticism from Sam Trabucco at Alameda Research, Sam Bankman-Fried at FTX, Charles Hoskinson, the founder of Cardano, and others for “trolling” rival cryptocurrency projects on Twitter. As a result, Do Kwon lost friends in the crypto business.
Two months before the Terra crash, several cryptocurrency traders on Twitter even claimed that LUNA was a Ponzi scheme. They drew attention to the fact that, in contrast to other popular stablecoins, it was not adequately backed by monetary resources.
Although it is not clear if the LUNA Foundation Guard (LFGBitcoin )’s holdings were sufficient to reinstate the UST peg or the LUNA price, the LFG was reported to be one of the greatest Bitcoin holders in the world, generating headlines that encouraged investors to purchase both LUNA and Bitcoin.
LUNA Crash
Holders of TerraUSD didn’t wait for the initial UST crash, which was more severe than usual, to stabilise before selling their UST for LUNA, which increased the supply of LUNA and led to a panic sale of that currency as well. The scenario worsened when UST lost 90% of its value and LUNA crashed further.
Typically, panic selling, shorting, stop losses being hit, and a cascade of forced long sales are the only factors that cause a cryptocurrency crash, whether in Bitcoin or an altcoin. The number of existing coins remains constant, including those in use and those still in storage.
Therefore, the coin can recover if the panic was brought on by some FUD (fear, uncertainty, or doubt) brought on by bad news that later faded from the headlines, such as China excluding Bitcoin, a crypto exchange being hacked, or a pandemic. Nothing fundamentally changed regarding the coin’s intrinsic value and the technology that powers it.
The number of coins in use would remain roughly the same. For instance, new Bitcoin mining is a fairly sluggish process by design. Additionally, the total supply of Bitcoin is always limited to 21 million (the max collection of LUNA is now 6.9 trillion).
Therefore, the value of Bitcoin only ever drops on exchange platforms as investors buy the blood in a panic and individuals start to lose their cool. Historically, however, Bitcoin has always rebounded to reach new highs.
Due to the nature of algorithmic stablecoins, the black swan occurrence with the Terra (LUNA) crash produced hyperinflation of the Terra (LUNA) supply, which swiftly reached a billion LUNA coins before spiralling out of control into the billions.
LUNA Price Today
LUNA is now trading for about $0.00018. At roughly $0.06, or half a cent, LUNA would regain its initial market valuation of nearly $40 billion, a more achievable mid-term price goal but still challenging given the deterioration in Terra’s standing.
Many traders still want to purchase LUNA; therefore, the price of LUNA could see significant short-term movements. Since its low of $0.00000112 on May 13, the price of LUNA has increased by 160 times.
The LUNA price has increased 531 times from the lows this week to trade as high as $0.000595 on Binance. Some seasoned traders saw a move of more than 50,000%.
A ‘fat finger’ mistaken market buy that would have caused slippage at one point caused the LUNA price to even surge to the upside in a single second, reaching $0.002. That was fixed right after, but other traders contend that because such wicks signify supply zones, they eventually fill up.
Should You Buy LUNA
However, suppose you believe it is undervalued and has the potential to increase by at least 10x to reach a market valuation of roughly $10–12 billion (now $1.19 billion). In that case, it might be a worthwhile buy. Binance still warns investors about the risks associated with purchasing LUNA on its website.
With a current 549 trillion-coin supply, meme coin Shiba Inu still has a market valuation of $6.7 billion.
Due to LUNA’s extreme volatility, which will depend on the announcements made by Do Kwon and the Terra team, only invest what you can afford to renounce in this cryptocurrency.
Purchasing Bitcoin at the current low price level may be a better low-risk investment option.
LUNA Hard Fork
When a Terra 2.0 hard fork to create a new Terra (LUNA) and a Terra Classic were proposed earlier today, the price of LUNA fell. The LUNA price plummeted, and LUNA Classic started trending on Twitter due to investors’ apparent dissatisfaction with the recovery plan.
A Terra validator who opposes the hard fork has written a blog post urging readers to back the creation of a new blockchain run by the LUNA community instead.
The resignation of several Terraform Labs’ legal staff members in the wake of the UST and Terra collapse is currently breaking news on The Block. Dissension inside Terra, a lack of consensus, and now even resignations will probably not be positive factors for the price.
Additionally, Coinbase has announced that on May 27, Wrapped LUNA (WLUNA) will be delisted.
If you still want to catch a falling knife, one way to buy LUNA would be to wait for eToro to relist it. At that time, it is safer to purchase LUNA.
