They said it couldn’t happen, yet in an instant billions went up in smoke. Literally into thin air and investors were taken once again. Was it just bad finance, bad leadership or panic? Or was there something more insidious at play?
As a result of the Luna cryptocurrency and the (CRYPTO: UST) stablecoin, which are both linked to the Terra (CRYPTO: LUNA) blockchain, the cryptocurrency market has tanked and is struggling to recover, with some even predicting the collapse of the entire cryptocurrency market.
This is What Happened
Luna Foundation Guard (LFG), a non-profit organization intended to keep TerraUSD’s value stable, had been amassing large reserves of cryptocurrencies to support the peg, including over 80,394 BTC. However, unlike USDT, TerraUSD was backed by none of the traditional assets like cash, treasuries, or other assets. The supposed stability of its value was determined by algorithms that tied it to Luna.
Meanwhile, Terraform Labs raised more than $200 million from firms like Lightspeed Venture Partners and Galaxy Digital to fund projects based on LUNA, despite critics’ doubts about the technology.
With Luna’s total value exceeding $40 billion, individual traders and wealthy investors were swept up in a frenzy of excitement.
The price of LUNA token plunged when Terra Luna’s UST stablecoin, backed by LUNA tokens and billions in Bitcoins, depegged from the US dollar on May 7. After TerraUSD collapsed, the LFG spent much of its Bitcoin to prop it up – but nothing worked.
On May 13, UST plunged to an all-time low of $0.04495199 and triggered a death spiral for its sister token Luna. The Terra blockchain was stopped.
Some find this concerning, reminiscent of the 2008 financial crisis trigger – the collapse of Lehman Brothers. Stablecoins are designed to maintain a 1-1 peg with the dollar and remain immune to volatility, but UST faltered and veered well away from $1, leaving its holders with billions of dollars in losses. LUNA and UST holders lost $40 billion combined – a classic case of crypto hype becoming a reality.
Even Binance founder Changpeng Zhao fell for it, joking he was “poor again” after the exchange’s investments in Luna fell to $2,200 from $1.6 billion. In the eyes of retail investors, it was no laughing matter since some people who invested in Luna or TerraUSD were genuinely desperate and shared lists of suicide hotlines.
There’s Something Off About This
It all started on May 7 when some large investors sold off $500 million worth of UST on Anchor, a savings protocol that serves as UST’s biggest supply sink.
Although LUNA began to plummet heavily, Terra dismissed concerns at the time.
After UST’s value started declining on May 9th, the LFG decided to sell Bitcoins and begin purchasing UST in order to re-establish the peg with the dollar, however the move resulted in the peg being slashed further and LUNA went into a death spiral. The LFG’s reserves were emptied from the Bitcoin addresses within the next day.
The situation looked more like selling your cows to buy sheep that were jumping off a cliff, so you were left with nothing but dead sheep. Wouldn’t it make more sense to keep BTC and use it to reimburse the community or start over from scratch with it?
Another unanswered question is why there was no locking mechanism. The supply of Luna ballooned to over 6.5 trillion during its death spiral. They just kept minting it down to the end.
No central bank, no matter how desperate, issues too much money. Imagine the Federal Reserve printing trillions of dollars today to help the US economy. It was totally irresponsible of Terra to act in such a way.
Where Is the LFG’s BTC Now?
The collapse of Terra’s UST stablecoin has raised questions about what exactly happened to the Bitcoin held in the LFG reserve to prevent exactly such a situation from happening. Did Terra really sell BTC to protect the UST peg?
Elliptic’s blockchain analytics tools tracked the movement of UST reserves following its collapse.
The LFG announced on May 9th that it would be loaning $750M worth of BTC to OTC trading firms to safeguard the UST peg, and Terra co-founder Do Kwon later clarified that the Bitcoin will be traded.
The same day, 22,189 BTC – worth approximately $750 million at the time – were transferred from a Bitcoin address linked to the LFG to another one. This same address later received 30,000 BTC – then worth around $930 million – from other LFG wallets. A few hours later, these 52,189 BTC were transferred to a single account at Gemini cryptocurrency exchange across several Bitcoin transactions. The assets cannot be traced further or determined if they were sold to support the UST price, according to Elliptic.
This left Terra with 28,205 BTC in its reserves, which was transferred in one transaction to Binance on May 10th. Sending assets to an exchange does not guarantee that they have been exchanged for other assets, so it is impossible to know if these Bitcoins have been sold for UST or simply moved in an unknown direction.
Elliptic’s final conclusion is that those seeking recompense for losses suffered as a result of exposure to UST may be interested in determining whether these Bitcoins remain on these exchanges.
The Market Panic Made Someone Rich
A shockwave hit the crypto market with the UST crash, creating a real mess. The market was at a point of extreme fear, where even the most bullish analysts questioned whether cryptocurrency was really doomed.
After the UST de-pegged, the world’s largest stablecoin, Tether (USDT), wiggled a bit from its dollar peg, sparking huge concern. It quickly recovered, however, calming everybody’s nerves.
In the midst of this mess, the wealthiest Bitcoin wallets were piling up the flagship cryptocurrency when its price was low.
According to NYT, the UST and Luna crashes have hurt retail traders, but not investment firms that cashed out early and reaped huge profits.
In a frenzied race to discover what caused UST and LUNA’s demise, ADA founder Charles Hoskinson claimed Blackrock and Citadel borrowed 100K Bitcoin from Gemini, traded 25% of it for UST, then dumped BTC and bought it back cheaply, pocketing the difference.
These allegations have, however, been denied by all of the parties involved. There was even a press release from BlackRock stating that they had no involvement in the LUNA and UST crashes. Charles Hoskinson deleted the tweet later.
What’s Next for Terra?
Many people believe Luna’s story is over, but Terraform Labs CEO Do Kwon has put forward a governance proposal asking community members whether the UST stablecoin ought to be ditched and a new blockchain should be created in its place.
The new Terra blockchain would be split into two according to Kwon’s plan. There would be two chains operating simultaneously at the same time, but each would function differently.
Meanwhile, Mike Novogratz, CEO of Galaxy Digital, billionaire investor, who had been an avid Terra supporter, said in a public letter that Galaxy had invested in Luna as early as 2020 because it had “significant growth potential,” but it ended up being “a big idea that failed.”
Therefore, it seems more likely that investors’ respect can’t be restored and Luna is indeed over, regardless of Do Kwon’s attempts to save face.
Despite the fact that there is no direct evidence of who was responsible for the crash or if it was in fact intentional, it is clear that someone made a killing when it happened, while ordinary traders and retail investors suffered losses that were extremely severe.
In the meantime, Bitcoin’s value has recovered to trade near $29,294 at the time of writing, so there is relief that the crypto market and Bitcoin are here to stay. We should learn from this case not to invest more than we can afford to lose, not to put blind faith in even solid projects, and to think carefully before making important investment decisions.
This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.