Terra and Luna’s collapse shakes the crypto ecosystem

Vrasidas Neofytou
Head of Investment Research

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Cryptocurrency investors had one of their darkest months in May as they watched Terra’s stable coin losing its dollar peg and the sister token Luna tanking 100% which has shaken the crypto eco-system.

The TerraUSD is an algorithmic stable coin pegged to the US dollar in a 1:1 ratio, while Luna was one of the prominent digital coins, ranking among the 10 most valuable tokens in the market.

LUNA, which posted a record-high of 120 dollars last April, lost nearly 99% of its value, dipping to under a penny following the oversupply of the token to save the Terra stable coin.

The entire episode calls into question the real-world utility and viability of the stable coins since they were introduced to address the high price volatility of Bitcoin and other altcoins.

The death spiral in the Terra project has temporarily scared investors with the price of Bitcoin falling to as low as $26,000, its lowest since 2020, while the crypto industry lost nearly a half of trillion dollars in market cap.

While the threat of contagion from Terra’s apparent collapse could take months to fully calculate, the crash could result in lawmakers becoming stricter around decentralized stable coins and tokens.

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