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UST and Luna Coins Collapse, Creating Crypto Chaos

The crypto market has lost almost $1.6 trillion from its all-time high of $3 trillion.
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After days of cryptocurrency chaos, let's take stock of the damage. 

The cryptocurrency market is valued at $1.35 trillion, a good deal less than half its $3 trillion in November.

Almost all digital currencies, even stablecoins, have been in the red for the past seven days. 

Bitcoin, the king of cryptocurrencies, has lost almost 56% of its market value compared with its record of $69,044.77 reached on Nov. 10, according to CoinGecko. Prices are now around $30,000 after falling as low as $28,000, levels not seen since December 2020. 

Ether, the native token of the popular Ethereum blockchain that enables the creation of decentralized finance apps and NFTs, is down 57% from its all-time high of $4,878.26 reached on Nov. 10. 

Crypto enthusiast favorites dogecoin and shiba inu have dropped 87.3% and 84% respectively from their all-time high.

Only a few stablecoins, whose prices aren't supposed to be volatile because they track the dollar, have held up. Tether, the leading stablecoin by market value, is up 0.2% over the past seven days, while USD Coin is up 0.5% and Binance USD is up 0.4%.

UST and Luna Are Next to Worthless

But the disaster affects the Terra ecosystem, which still was in fashion just a few weeks ago.

Its native token games, including the stablecoin UST or TerraUSD, and the Luna token, have lost almost all their value.

UST, which is pegged to the dollar, at last check was down to just $0.102542 -- a bit more than a dime. It's down 84% over the past 24 hours, according to CoinGecko. The stablecoin, which has lost stability, is down 91.4% from its high of $1.09 hit on Jan. 11. 

As for the Luna token, its price plummeted to $0.0001826. The crypto has lost 99.9% of its value in the past 24 hours. It traded as high as $119.18 on April 5, according to CoinGecko.

The two cryptos took a massive blow on May 13 when crypto exchanges Binance and OKX decided to delist them in order to protect their customers.

"At #Binance we prioritize user protection," Binance Founder Changpeng "CZ" Zhao said in a tweet. "We made the decision to suspend LUNA and UST trading."

"An exponential amount of new LUNA were minted due to flaws in the design of the Terra protocol. Their validators have suspended their entire network, resulting in no deposits or withdrawals possible to or from any exchange.," CZ added.

"Some of our users, unaware of the large amounts of newly minted LUNA outside the exchange, started to buy LUNA again, without understanding that as soon as deposits are allowed, the price will likely crash further. Due to these significant risks, we suspended trading."

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Why the Crash?

Many investors have liquidated crypto in line with the weakness in the equity market because they fear a worsening economic situation. Since crypto is now considered a risky asset just as highflying tech stocks are, they are the first to suffer from negative investor sentiment. 

The selloff is also linked to the return of fears of rug pulls and crypto scams after the disaster of the algorithmic stablecoin UST and Luna coin, which both belong to the Terra ecosystem. 

UST/TerraUSD lost the $1 peg this week. After an initial drop to $0.65, the currency was dragged to $0.22. The Luna token is down more than 99% in value.

The operating principle of UST, which shares a mechanism with Luna, is this: When the price decreases, UST owners can resell their assets to Luna Foundation Guard in exchange for $1. This way, the stablecoin reserve decreases, thus increasing its value until it returns to a normal level. But the system does not take into account situations where users redeem huge amounts of their UST at once in a short period. 

Faced with fears linked to growth, several investors over the weekend simultaneously parted with their UST assets. In response, the LFG, which has a reserve of bitcoins, sold everything to reinject capital into the UST. Making matters worse, the bitcoins the foundation purchased were valued $42,000 at the time and now have lost a big part of their value. Since then, there has been chaos all around.

What Now?

With no more emergency solutions, investors continue to resell their UST en masse. 

Attempting to reassure investors, Do Kwon, the South Korean crypto entrepreneur who co-founded Terraform Labs, plans to buy $10 billion of bitcoin through LFG. These funds will serve as a backstop if the value of the UST collapses. 

Bitcoin would thus become the reserve currency for the Terra ecosystem.

The plan is to enable UST holders to be able to redeem their tokens in bitcoin. But how will this actually work? No answers yet.

LFG currently holds $3.5 billion of bitcoin. On Monday, the foundation reported disbursing $1.5 billion of those funds: it's lending $750 million of bitcoin to trading firms to protect the value of UST, and it will use $750 million of UST to continue accumulating bitcoins.

Hard to know whether it will work.

What Are the Losers From the Chaos? 

Crypto

The UST/Luna disaster has thrown a huge wrench into all the cryptosphere's efforts and initiatives to convince the general public and regulators that crypto is the future and that, in the short term, it is maturing. Distrust of crypto has resurfaced as many people again believe that such projects are scams. 

Tesla

The premium electric vehicle maker invested $1.5 billion in bitcoin on Feb. 1, 2021. This investment is currently valued at $1.32 billion. according to Bitcoin Treasuries. Tesla may well depreciate this investment and record a charge in its accounts. 

Elon Musk's group has not yet submitted its Securities and Exchange Commission Form 10-Q, a document in which listed companies must outline the risks associated with their businesses. There's little doubt that when Tesla  (TSLA) - Get Tesla Inc Report does file the form, it will communicate about the value of its 43,200 bitcoins.

MicroStrategy and Michael Saylor

Michael Saylor and MicroStrategy  (MSTR) - Get MicroStrategy Incorporated Class A Report have become bitcoin champions with their 2020 decision to implement an investment strategy in the most popular cryptocurrency. 

The company has on its balance sheet 129,218 bitcoins bought at $3.97 billion. At last check this investment was down a bit, valued at $3.95 billion, according to Bitcoin Treasuries.