Even with Bitcoin’s price destabilization over the past week, most of the attention is on the abysmal price performance of Terra Luna, which is down 93%, and UST, whose price is supposed to stay pegged to USD but currently trading at 70% below at $0.3. The founder of Terra Luna, Do Kwon, released a series of statements on Twitter regarding the situation. Will Terra Luna and UST recover? Let’s take a closer look at the current situation.
Terra Luna’s price started its downward spiral when UST de-pegged from USD on May 10th and started trading at 10% below its pegged value.
This created a massive arbitrage opportunity for traders and investors who could convert UST to $1 worth of LUNA, then dump the LUNA on an exchange—rinsing and repeating the process to accumulate gains over the past 24 hours.
As more and more traders arbitraged across significant exchanges like Binance and KuCoin, LUNA’s price decreased to a low of $0.92. That’s over a 90% drop within several days!
The biggest issue with the reserve backing Terra Luna is that it wasn’t automatic. Unfortunately, Do Kwon gave clues about the manual system when he mentioned selling off the BTC collateral to support UST.
Once whales got ahold of that information, they used it to cause massive sell pressure for UST, effectively de-pegging the stablecoin and creating a profitable arbitrage opportunity for traders.
At this time, any reserves that Terra Luna had to stabilize UST couldn’t save the peg. Do Kwon, Terra Luna’s founder, took to Twitter to further explain the situation and discuss a recovery plan for LUNA and UST.
Do Kwon said:
“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it.
The Terra ecosystem is one of the most vibrant in the crypto industry, with hundreds of passionate teams building category defining applications within. As long as these builders, TFL among them, continue to build – we will come out of this together.”
Do Kwon ended his Twitter statement this morning, claiming that Luna will recover in the long term, attempting to provide investors with some hope of recovering their lost assets since this debacle began.
It’s safe to say that the response from investors was quite stark since LUNA’s value dropped over 90% since its price four days ago. Many traders compared the recent price decline of LUNA to a rug pull since that’s usually when cryptocurrencies see a devaluation of that size.
LUNA and UST prices can only start to recover once the arbitrage opportunities dry out and UST can start its re-peg back to $1. There will be constant FUD and sell pressure both for UST and LUNA until then.
After LUNA tanked to $19 last night, many traders attempted to catch the bottom to take advantage of the low prices, only to lose 90% of their portfolio this morning as the cryptocurrency continues its nosedive.
Bottoming out at $0.87 this morning, we’re seeing LUNA rebounding to $1.95; whether that will hold is yet to be seen.
Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency.
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