What happened to Terra (LUNA), which some traders that rushed to buy LUNA crypto coins didn’t know, was inflation of the circulating supply.
The severe inflation prompted the Terraform Labs team to halt the Terra blockchain, but the damage had been done – hyper inflation caused the LUNA supply of coins in circulation to increase from around 350 million to 6.5 trillion during the crash, an over 18,000 times increase.
Luna Crypto What Happened
By the law of supply and demand, if there’s 18570x more of something, it becomes that much less valuable per unit. It’s no longer as rare or scarce – crypto has been referred to as ‘digital Gold’ by the Winklevoss twins, billionaire founders of Gemini Exchange.
Add on investors selling LUNA themselves in the panic, plus liquidations, and the result was LUNA dropping over 99% from its all time high of $119 to under a dollar, then 99% again to one cent, then 99% twice more to its current 2022 low of $0.00000112 against Binance USD (BUSD), one of the few trading pairs that still existed for it at that point – many crypto exchanges delisted it.
It didn’t help that the same day Bitcoin dropped under $27,000, and the S&P 500 under 4,000, both for the first time in over a year.
Considered one of the most regulated, safest crypto platforms for beginners, eToro.com suspended LUNA trading at just under one cent – saving those who wanted to buy LUNA crypto tokens from two of those 99% drops.
What caused the crash is complicated, and many LUNA investors are wondering what happened to the coin that was once a top 10 crypto asset by market cap – leading one investor to ask @terra_money to ‘explain in football terms’.
What is Terra LUNA
What happened to LUNA was different to other crypto crashes because of what the Terra (LUNA) crypto asset is – its basic aim was to enable stablecoins to be created for decentralized finance (DeFi) applications.
Anyone around the world could and did use it like a payments network without the need for a central bank, any banking institution or centralized entity like Visa – people could be their own payment processor. In the words of Goldman Sachs, DeFi is ‘easier to access for underbanked populations and provides faster settlements for users’.
The way the stablecoins were kept stable, pegged 1:1 to the dollar or another local currency was by making it possible to swap units of the stable coin, for a native token that wasn’t stable. LUNA was used in South Korea with a stable coin pegged to the Won, and in Mongolia with a stable coin for the Tugrik.
Terra (ticker symbol LUNA) was the native token used to keep TerraUSD (ticker symbol UST) stable, the main and largest stablecoin created by Terra Labs, with a 1:1 peg to USD.
If the stable coin drifted off its peg to the downside (becoming worth less than $1), LUNA could be used to ‘mint’ new UST, and stablize UST overall. Then vice versa if it lost its peg and became worth more than $1 – UST could be redeemed for LUNA, to lower the price of UST.
This mint and burn effect in this dual-token system was managed by an algorithm, happening automatically. The two cryptos (UST is now ranked the #47 largest asset) backed each other up – and it worked well, until it didn’t. If one fails, the other can too in a chain reaction, and that’s what happened.
UST Loses its Peg
It started when TerraUSD (UST) lost its peg, to a larger extent than normal – there’s still been no official explanation as to why, and there are many rumors of a co-ordinated attack, such as a large institutional entity or ‘whale’ borrowing a large amount of UST to dump on the market.
Do Kwon, CEO of Terraform Labs, had created enemies in the crypto industry through ‘trolling’ other crypto projects on Twitter, attracting criticism from Sam Trabucco at Alameda Research, Sam Bankman-Fried at FTX, the founder of Cardano Charles Hoskinson, and others.
Some traders on crypto Twitter had even alleged that LUNA was a ponzi scheme, two months before the Terra crash. They pointed out that unlike other successful stablecoins, it wasn’t properly backed by cash reserves.
LUNA Foundation Guard (LFG) did have Bitcoin reserves – it was said to be one of the largest Bitcoin holders in the world, making headlines that spurred investors on to buy LUNA, and Bitcoin – although they don’t appear to have been enough to restore the UST peg or LUNA price.
The initial UST crash was larger than normal, and holders of TerraUSD didn’t wait for it to stabilize – they dumped their UST for LUNA creating a higher LUNA supply, which was then also panic sold. The situation accelerated with UST losing 90% of its value and LUNA crashing even worse.
Normally a crypto crash, whether in Bitcoin or altcoins, is only a result of panic selling, shorting, stop losses being hit, and a liquidation cascade of long positions forced to sell. The amount of coins that exist – in circulation plus any still locked up in the total supply – doesn’t change.
So if the panic was due to some FUD (fear, uncertainty or doubt) caused by negative news – such as China banning Bitcoin, a crypto exchange being hacked, or a pandemic – which later left the headlines, the coin can recover as nothing fundamentally has changed in the coin’s intrinsic value and the tech behind it.
There would still be about the same number of coins in circulation. The process of mining new Bitcoin for example is very gradual by design. The maximum total supply of BTC is also always capped at 21 million (the max supply of LUNA is now 6.9 trillion).
So the value of BTC really only ever crashes on exchange platforms – where people panic and long term investors buy the blood – and so far historically always recovered to set new highs.
However with the Terra (LUNA) crash, due to the nature of algorithmic stablecoins, the black swan event caused hyper inflation of the Terra (LUNA) supply, hitting a billion LUNA coins quickly, then spiralling out of control into the trillions.
Can LUNA Recover
The only way for the LUNA price to recover to anywhere close to its former high over $100, would be to burn large amounts of the LUNA circulating supply from the 6.5 trillion today, back to somewhere near the 350 million it was before the crash.
That’s no easy feat – it has been announced as part of the LUNA and UST recovery plan but it remains to be seen if it can be achieved. Another question is will crypto recover – Bitcoin is holding stable around $30,000 but yet to breakout to the upside or close a candle above the daily EMA 8.
If the Terra supply isn’t burned, even recovering to $1 is in a sense mathematically impossible. The entire cryptocurrency market cap at its peak was $3 trillion, in November 2021 when Bitcoin was over $69,000, and Ethereum over $4,800.
At a LUNA price of $1 per coin, with a 6.5 trillion supply then the market capitalization of LUNA would be $6.5 trillion, twice the valuation of all cryptos, at that all time high.
Bitcoin’s market cap today is around $570 billion – the LUNA market cap would even flip Bitcoin before the LUNA price reached $0.09. No crypto has ever flipped Bitcoin.
LUNA would flip Ethereum, also unlikely as so much of DeFi runs on ETH, at around four cents – $0.04. Is Luna recoverable? Based on the tokenomics, not until the circulating supply is reduced.
Or until the market cap of crypto as a whole – today $1.27 trillion – increases. Compared to Gold with an $11 trillion market cap, cryptocurrency is undervalued. Tyler and Cameron Winklevoss predict that crypto could overtake Gold as a store of value in future years.
LUNA Price Today
The LUNA price now is around $0.00018. LUNA would return to its former market cap of around $40 billion – which is a more realistic mid term price target, and still difficult given the reputation of Terra has dropped – at approximately half of one cent, or $0.006.
LUNA could still put in strong short-term price moves as many traders do want to buy LUNA. The LUNA price today is already 160x higher than its May 13th low of $0.00000112.
The LUNA price this week has traded as high as $0.000595 on Binance – a 531x bounce from the lows. Some expert traders will have caught an over 50,000% move.
At one point the LUNA price even wicked to the upside in a split second reaching $0.002 – which would have been a ‘fat finger’ accidental market buy causing slippage. That instantly corrected, but some traders believe all wicks like that eventually do get filled as they represent supply areas.
That would be an over 10x increase from the LUNA price today. Some investors that decided to buy LUNA too early on the dip or already held it, will be dollar cost averaging into LUNA at this low price point in the hope of breaking even if it does move back to around $0.002.
Should You Buy LUNA
Binance still displays risk warnings for buying LUNA on its website, but if you’re confident it’s undervalued and could at least move up around 10x to recover around a $10-12 billion market cap (currently $1.19 billion) it could be a good buy.
Meme coin Shiba Inu still has a $6.7 billion market cap today with a 549 trillion circulating supply.
Only invest in LUNA what you can afford to lose as LUNA is highly volatile and will spike or drop depending on the announcements made by Do Kwon and the Terra team.
It may be a better low risk investment to buy Bitcoin for the long term at the current cheap price levels.
LUNA Hard Fork
Earlier today the LUNA price dropped when a Terra 2.0 hard fork was proposed – to form a new Terra (LUNA) and a Terra Classic. Investors did not seem happy with that recovery plan, as the LUNA price dropped and LUNA Classic began to trend on Twitter.
One Terra validator has voiced opposition to the hard fork, publishing a blog to urge others to instead support the building of a new blockchain governed by the LUNA community.
It’s also now breaking news on The Block that a number of the Terraform Labs legal team have resigned following the UST and Terra collapse. Dissent in the ranks at Terra, a lack of consensus and now even resignations will likely not be bullish for the price.
Coinbase has also announced Wrapped LUNA (WLUNA) will be delisted on May 27th.
In terms of where to buy LUNA if you still want to catch a falling knife one option would be to wait until eToro relists it – when they decide to do that, is when it will likely to be safest to buy LUNA.