4 questions to understand the fall of Luna and Terra UST cryptocurrencies

This will be one of the biggest cryptocurrency crashes ever! Luna, one of the top 10 cryptocurrencies in the world, collapsed in just two weeks and will be declared almost dead. This rapid and strong drop affected the entire blockchain called “Terra” UST “.

This Friday, May 13, in the morning, the Terra blockchain was disabled for the second time in a few hours. Therefore, it was impossible to buy or sell tokens of this cryptocurrency.

Who are Luna and Terra?

These are elements of the same blockchain. This “blockchain” in French is a batch of transactions of the same network, starting with the oldest and ending with the most recent. One of the most famous blockchains is bitcoin, which has its own cryptocurrency.

In the case of Terra, this is a blockchain created in 2018, which, like any blockchain, has block “validators” to protect it.

All these currencies are grouped in a stablecoin. These currencies are usually pegged to a classic fiduciary currency such as the dollar (in the vast majority of cases) or the euro. In the case of Terra 1, UST (its cryptocurrency) was equivalent to $1.

It was one of the most important cryptocurrencies with a market capitalization of just over $7 billion.

Why did they collapse?

There has been a sharp drop in cryptocurrencies for several weeks, which may be partly due to the current economic situation. Large multinational corporations such as Netflix have experienced difficulties, in particular, due to the loss of a large number of subscribers.

From a political point of view, the cessation of investments in cryptocurrencies on the territory of Russia has also slowed down their progress, as well as the restrictions adopted by the Fed (US Federal Reserve System) in relation to these currencies, which are considered to be very volatile and rather unstable.

In the case of Terra UST, it was linked by an algorithm to Luna. Investors are increasingly fearful that the cryptocurrency is selling off its shares en masse. The demand to sell the latter was so strong that the UST algorithms could not withstand such high volatility and collapsed.

What are the consequences?

As of today, the price of UST is around $0.20, it even dropped to $0.004 when it was worth over $86 on May 5, 2022. The dizzying fall, which continues to dangerously approach 0, makes Terra almost a “dead” cryptocurrency.

This shows the limits of these algorithms and this “Stablechain” market which is very volatile and not very resilient to shocks like the shocks of the last 48 hours.

Unlike traditional fiat currency, cryptocurrencies have a limited and controlled supply. As far as our classical currencies are concerned, the banks have much larger reserves and can inject money by running the printing press, depending on the economic needs of the country.

Should we be afraid of a similar phenomenon for bitcoins?

Bitcoin is the most famous cryptocurrency, it causes a lot of movement, but it continues to raise a lot of questions.

The fall in the price of bitcoin also hastened the collapse of Terra UST and Luna. In times of war and especially complex geopolitical movements, investors prefer to turn to safe havens, which are much more stable and secure than cryptocurrencies.

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