Bitcoin Selloff Fears Grow, LUNA Crashes, and UST Battles for Stability

Written by C, Fiona

Last updated: 2022-05-10

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Panic in the crypto market increased over the weekend when the UST stablecoin briefly lost its peg to the U.S. dollar.

TerraUSD struggled to hold onto the $1 mark on Saturday. While data shows it only fell to a low of $0.9905 — a fairly routine blip — prices fell as low as $0.9857 on some exchanges.

What makes this story interesting is that UST is an algorithmic stablecoin, meaning incentives are used to keep the asset’s price stable.

When UST is worth more than $1, LUNA is burned so more units of this stablecoin can enter circulation. Conversely, when UST’s value dips below $1, units are taken out of circulation in order to purchase LUNA.

A depeg of the UST stablecoin has the potential to send shockwaves through the crypto ecosystem — more so now than a few months ago.

That’s because the Luna Foundation Guard, a nonprofit tasked with building reserves for UST, now holds a staggering 80,000 BTC — a war chest it would begin to sell to defend the stablecoin’s peg if necessary.

Data shows LUNA is by far and away the worst-performing altcoin in the top 10 by market cap. It’s fallen by 5.6% over the past 24 hours — and by 26% over the past week.

Do Kwon’s Reaction

LFG’s Bitcoin reserves were untouched over the weekend, but nonetheless, some crypto analysts remain concerned about the selling pressure that this foundation could end up exerting on the market.

UST and LUNA are based on the Terra blockchain, and its co-founder Do Kwon appeared amused by the weekend frenzy on Twitter — describing it as an “amusing morning” and adding: “I love chaos.”

On Monday, Kwon revealed that the Luna Foundation Guard’s council has now voted to deploy $1.5 billion in capital — half in BTC and half in UST — “to allay market concerns” surrounding the stablecoin.

He stressed that LFG is not trying to exit its Bitcoin position after the world’s biggest cryptocurrency slumped to $33,500 — down 51% from all-time highs of $68,789 that were set back in November 2021.

In practice, he said this fund would “significantly strengthen the liquidity around the UST peg.” The funds will be used to buy the stablecoin when prices are trading below their target of $1, while Bitcoin will be purchased if UST is worth $1 or more.

Explaining the reasons for this step, the Luna Foundation Guard wrote:

“Over the past several days, market volatility across crypto assets has been significant … It is prudent to prepare for future volatility.”