A bank of cryptocurrency miners operates at the Scrubgrass Plant in Kennerdale, Pa., on March 8.ALAN RELEASED/Reuters
TerraUSD, the world’s fourth largest stablecoin, lost a third of its value on Tuesday, spooking crypto investors and partly contributing to Bitcoin falling below $30,000 for the first time in 10 months.
Stablecoins are digital tokens pegged to the value of traditional assets, such as the US dollar. They are popular as safe havens in times of turmoil in the crypto markets and are a common medium of exchange, often used by traders to move funds and speculate on other cryptocurrencies.
TerraUSD, also known as ‘UST’, is one of the so-called algorithmic stablecoins and is currently the fourth largest stablecoin by market cap. On Tuesday it broke its 1:1 parity with the dollar and fell as low as $0.67, according to the Coingecko pricing site.
The token rose to prominence earlier this year when the Luna Foundation Guard, a non-profit organization affiliated with Terraform Labs, the company behind TerraUSD, pledged to amass $10 billion worth of bitcoin to support its peg to the dollar.
Unlike other stablecoins that hold reserves in traditional assets, TerraUSD maintains its peg through an algorithm that moderates supply and demand in a complex process that involves the use of another balancing token, Luna.
Luna Foundation Guard said in a tweet on Monday that it would defend TerraUSD’s dollar peg through $1.5 billion in loans to OTC trading firms, half in bitcoin and half in TerraUSD.
Luna Foundation Guard and Terraform Labs could not be reached for comment.
Justin d’Anethan Institutional, director of sales at Amber Group, said the use of bitcoin as a reserve had created a vicious cycle for TerraUSD, with selloffs in both tokens pushing the other lower.
“Bitcoin is falling as it is sold to defend an ecosystem that is suffering, the ecosystem that is suffering is creating even more panic in (TerraUSD), which is weighing on the Luna token, which requires the foundation to use more reserves to supplement and defend the peg”, he added.
“It’s not a fun situation to be in.”
Stablecoins as an asset class have generally benefited from market volatility in the crypto markets. Three stablecoins are now among the top ten cryptocurrencies by market capitalization, with TerraUSD in eleventh place.
Other major stablecoins such as Tether and USDC say they are backed by real assets and therefore not vulnerable to the same issues that have plagued TerraUSD.
But the cryptocurrency market in general has taken a hit in line with declines in traditional financial markets.
Bitcoin fell over $30,000 for the first time since July 2021 on Tuesday morning, falling alongside other “risk-free” traditional assets such as tech stocks, but also hit by the TerraUSD sell-off.
These declines in the face of weakening risk appetite counter the view of some cryptocurrency enthusiasts that cryptocurrencies are a store of value, similar to gold.
Bitcoin has lost more than half its value since hitting an all-time high of $69,000 in November 2021.
Analysts at Singapore’s QCP Capital said in a note that while Bitcoin currently held at a key support level, “there is material tail risk from (TerraUSD) de-pegging coupled with macro concerns.”
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Reference-www.theglobeandmail.com