Cryptocurrency is well-known for its volatility. Reds on the chart are nothing new or unexpected. Bitcoin, arguably the most successful and lasting coin, has had its share of downs in recent weeks.
However, a greater shockwave was felt in the crypto market in May. TerraUSD has pumped to about a dollar since its introduction. However, it crashed on the 9th of May 2022, and the worth was about $0.11.
Crypto investors were still licking their wounds from this crash when Terra’s sister coin-Luna experienced a massive dip. Luna coin had a worth of more than $80 but crashed to $0.000156. Undoubtedly, this is one of the jaw-dropping crashes of all time in the crypto market. Billions of dollars were lost, and the Terra ecosystem is in ruins.
Here is what you need to know about the crash.
What Is A Stable Coin?
The first step to understanding the crash is understanding the concept of a stablecoin. This type of coin is associated with a more stable asset. For example, tether that has affiliations to the US dollar. Therefore, you can exchange either of these coins for actual dollars.
The aim of stable coins is to protect investors from the cryptocurrency market’s volatility. Terraform Labs created the UST coin, which is supposed to be a stable coin to support their ecosystem. However, it is not pegged to the US dollars. Instead, it is backed by an algorithm and bitcoin reserves. As we can deduce from the crash, this stability method is not very reliable.
What Are Terra, UST, And Luna?
Terra is a blockchain like Bitcoin and Ethereum. However, terra produces Luna tokens while Ethereum produces ether tokens. You need to burn the token to generate the UST. For example, suppose the value of the Luna token is $50. You can burn it to earn 50 UST. This burning process is essential to make Luna a more valuable token.
The CEO of Terra, Do Kwon, created a Luna Foundation Guard to protect the reserves. The foundation had about $2.3 billion bitcoin in reserve. The plan was to buy UST if it dipped below $1 with the money generated from selling the bitcoin.
Why Did Terra Crash?
The Luna crash was influenced by TerraUSD (UST), a stable coin pegged to the US dollar.
On May 7, more than $2 billion worth of UST was taken out of the Anchor Protocol, and many of it was sold immediately. These massive sales caused a dip in the price to about 91 cents. Therefore, many traders tried to exchange 90 cents worth of UST for $1 worth of Luna. However, only $100 million worth of UST may be burned each day.
Now that the “so-called stable coin,” UST, could not retain its peg, many investors were eager to sell. The market capital of UST at the beginning of May was about $18 billion but has reached a new low of $770 million.
The sophisticated algorithm designed to keep Terra at a fixed price was overwhelmed, and the system failed. This could be attributed to the high rate of liquidation, which made it impossible for the automatic stabilizers to produce any positive results.
Can You Make A Profit From This Crash?
The founder of Terra is actively working to resurrect the stablecoin. There is a high chance for the coin to recover from its previous market performance. According to Investing Cube, Luna has a “good chance” of recovering from the crash.
Terra’s founder Kwon also tweeted: “The Terra ecosystem is one of the most vibrant in the crypto industry, with hundreds of passionate teams building category-defining applications within… Terra’s return to form will be a sight to behold.”
Kelvin Maina also had speculation about the recovery of Luna. According to the analyst, “For Luna to recover, they will need to address the problem and show clearly that such a drop will not happen again. As an analyst, I expect to see a bump in Luna prices after UST is pegged back to the dollar. I also expect the prices to start recovering after the Terra project shows that similar problems will not happen in the future.”
There is no guarantee that you can make a profit from the crash in Luna. However, be careful about buying the dip, the usual phrase in crypto investment. Luna’s founder has proposed to unveil another class of Terra Luna. Therefore, the old blockchain may die out for the new one to prosper.
Recognize the tax consequences of all crypto transactions. Even a loss can trigger important tax reporting requirements to the Internal Revenue Service or state tax authority.
To avoid making expensive tax mistakes use the services of a crypto CPA or crypto accountant like Results Tax Accountants. The Results Tax Accountant’s blog at http://www.resultstaxaccountants.com/blog provides a lot of free information to help you reduce your cryptocurrency taxes.
Final advice, don’t rush to buy the dip. Observe the trends carefully before putting money into Luna or any other coin.
Author Bio:
Mark Robert is a Crypto tax accountant and founder of Results Tax Accountants at www.ResultsTaxAccountants.com, a firm specializing in small business, individual, cryptocurrency tax and accounting. He’s on a mission to help individuals and businesses eliminate tax and accounting headaches, stress and reduce their total tax burden.
