In principle, the price of a so-called stable cryptocurrency is linked to the price of a traditional currency, which guarantees investors a certain stability in the very volatile world of cryptocurrencies. (Photo: 123RF)
PARIS – Terra, a so-called stablecoin allegedly pegged to the US dollar, has lost more than half its value in 24 hours, setting off a wave of panic in an already hectic crypto asset market.
Terra (UST), normally close to $1, fell to around 30 cents on Wednesday, according to data from specialized website CoinGecko. It traded at 41 cents around 8:30 am Quebec time, down 55.3% from its price the day before.
In principle, the price of a so-called stable cryptocurrency is linked to the price of a traditional currency, which guarantees investors a certain stability in the very volatile world of cryptocurrencies.
But the stability of some of these cryptocurrencies is provided not by foreign exchange reserves, but by an algorithm that makes arbitrage based on the supply and demand of another cryptocurrency.
This is the case of terra, which is backed by a crypto asset developed by the Luna Foundation Guard, an organization that says it wants to “advance a decentralized economy.”
However, the digital token itself has fallen since the beginning of the week, driven by a wave of liquidations. It dropped nearly 95% to $1.69 on Wednesday, according to CoinGecko.
The Luna Foundation Guard announced on Monday that it sent the equivalent of $1.5 billion in bitcoin and terra to secure stablecoin parity with the dollar with no immediate effect.
Terra creator Do Kwon assured on Twitter on Tuesday that he was going to present a plan to restore the cryptocurrency, but the price of the currency did not recover.
For US Treasury Secretary Janet Yellen, who testified before the Senate Banking Committee on Tuesday, the episode “simply illustrates the fact that this is a fast-growing product, that it poses risks to financial stability, and that we need an adequate framework.”
Stricter regulation of “stablecoins” (stable cryptocurrencies) would be good in the long run, said Anto Paroyan, chief operating officer of “hedge fund” (hedge fund) ARK36, specializing in cryptocurrencies.
“But if stablecoin issuers are regulated as tightly as banks, it could stifle one of the most innovative, successful and important sectors of the cryptocurrency market,” he said.
Cryptocurrencies in general have been suffering for weeks now from investor aversion to risky assets amid the uncertainty created by the war in Ukraine and continued inflation.
Bitcoin briefly slipped below $30,000 on Tuesday, its lowest level since July.