Stablecoin Terra’s Fall And Broken Dollar Peg Spooks Wider Crypto Markets
TeraUSD, the world’s fourth-largest stablecoin, lost a third of its value on Tuesday, scaring cryptocurrency investors and partly contributing to bitcoin’s fall below $30,000 for the first time in 10 months.
Stablecoins are digital tokens that are pegged to the value of a traditional asset, such as the US dollar. They are popular as safe-haven in times of turmoil in crypto markets and are a common medium of exchange, often used by traders to move funds around and speculate on other cryptocurrencies.
TeraUSD, a so-called algorithmic stablecoin that is currently the fourth largest by market capitalization, broke its 1:1 peg for the dollar on Tuesday and fell to $0.67 according to price site Coingeco.
The token gained prominence earlier this year when the non-profit Luna Foundation Guard, an affiliate of TerraForm Labs, the company behind TerraUSD, pledged to collect $10 billion worth of bitcoin to support its dollar peg. .
Unlike other stablecoins that have reserves in traditional assets, TeraUSD maintains its peg through an algorithm that controls supply and demand in a complex process involving the use of another balance token, Luna.
The Luna Foundation Guard said in a tweet on Monday that it would protect the dollar peg of TeraUSD through $1.5 billion in loans to over-the-counter trading firms, half in bitcoin and half in TeraUSD.
Luna Foundation Guard and Terraform Labs could not be reached for comment.
The use of bitcoin as a reserve has created a vicious cycle for TeraUSD, with sell-offs in both tokens undercutting the other, said Justin D’Enathan, sales director at Amber Group.
“Bitcoin is going down because it is being sold to protect an ecosystem that is suffering, creating even more panic on the ecosystem victim (TerUSD), which is weighing in on the Luna token, for which The foundation needs to use more reserves to supplement and defend the peg,” he said.
“It’s not a fun situation.”
Bitcoin fell by more than $30,000 on Tuesday morning for the first time since July 2021, falling alongside other traditional “risk-off” assets such as tech stocks, but also weighed down by the TeraUSD selloff.
Analysts at Singapore-based QCP Capital said in a note that bitcoin is currently holding a key support level, adding “macro concerns as well as physical tail risk from (teraUSD) D-Peg.”