UST, the purported third-largest stablecoin by market capitalization pegged to $1, and its sister token, Luna, are experiencing a plunge, even driving the cryptocurrency leader Bitcoin to lose the psychological threshold of the $30,000 key integer level twice this week.
Many analysts have pointed out in unison that under the multiple pressures of high inflation fever and the Fed's aggressive "water collection" or stalling the economy, investors are flocking to escape risk assets, and a "crypto winter" is coming.
On Wednesday, May 11, according to coinDesk, the mainstream cryptocurrency trading platform, Bitcoin fell as deeply as $29,100, the second time in a week after Monday that it lost $30,000, the lowest since December 2020, and the lowest monday since July last year.
Ethereum, the second largest by market capitalization, also plunged 8% at one point and forced the $2100 round mark. At noon in the US stock market, Bitcoin maintained a decline of more than 1% in 24 hours, hovering at the $31,000 line, while Ethereum fell more than 4% and barely returned to above $2200.
In addition to the higher-than-expected increase in U.S. CPI consumer inflation in April, which accelerated investors' flight from cryptocurrency risk assets that are increasingly positively correlated with U.S. stocks, mainstream digital currencies, particularly Bitcoin, have also been linked to the loss of the stablecoin USD to $1 pegging.
UST, also known as TerraUSD, is an "algorithmic stablecoin" launched in 2018 by Singapore-based Terraform Labs, whose market capitalization subsequently surged and became the third largest stablecoin in the market, with a circulating supply of 16 billion tokens.
Algorithmic stablecoins are one of the three models of stablecoins, but unlike USDT (Tether), a company owned by Bifinex Exchange, and USDC jointly developed by Coinbase and Goldman Sachs, which support prices with dollars or asset collateral as reserves, the stablecoin is used as a balance between the stablecoin and the number of sister tokens through algorithms to maintain the value of the stablecoin.
THE UST was supposed to be "stably pegged" to $1, maintaining a balance of supply and demand by pairing it with its sister token Luna, which fluctuates in price, thereby keeping the price anchored at $1. Each time a UST is minted, the equivalent of $1 in Luna is destroyed or removed from circulation and vice versa.
But UST and Luna have suddenly "free fallen" since the end of last week, and the industry has been likened to a "bank run" due to the large number of sellers. Some analysts worry that the potential demise of UST could change the future of stablecoin regulation, or even the course of decentralized finance itself.
At one point the UST fell to an all-time low of 26 cents each on Wednesday before rebounding to 49 cents, plunging 44 percent in 24 hours. Luna lost about 99 percent of its value over the past seven days, falling to 81 cents at one point before recovering to $3.67, but still 87 percent deeper in 24 hours and down 95 percent in the past week. At the same time, Bitcoin also cut from a new high of $69,000 last November.
Many have pointed out that the collapse of the UST price under the pressure of the recent cryptocurrency sell-off will lead to further panic in the market, which may have a potential ripple effect of accelerated collapse of mainstream cryptocurrencies. In addition to the loss of market confidence, it is also related to the concern that the institutions behind UST have hoarded a large amount of bitcoin in the past, and it is likely that the future will be forced from the largest buyer of bitcoin to the largest seller in recent months.
Terraform Labs, which created UST, also has a nonprofit called Luna Foundation Guard, which has promised to buy up to $10 billion worth of bitcoin to support UST's ability to anchor $1 in times of crisis. The latest news shows that the group already holds $3.5 billion in bitcoin, when the purchase price was higher than $30,000 each.
Earlier this week, Luna Foundation Guard pledged more than $1 billion in bitcoin and UST to third-party trading platforms, hoping to support the UST price through the mutual exchange between UST and bitcoin (rather than the exchange between UST and the plunging Luna). But the plan didn't work, and UST on Wednesday hit a new low and moved further away from the $1 anchor value.
On Wednesday, South Korean cryptocurrency entrepreneur Do Kwon, the biggest "boss" behind UST, tweeted the latest "market support" plan, which is to significantly increase Luna's minting capacity from $293 million to more than $1.2 billion. This will put more Luna on the market to exchange for UST that is already oversupplied (investors have fled for sale), hoping to raise the UST price again to $1.
However, many people in the industry are not confident in this, and people are more worried that the organization behind UST may have sold or will sell most of its Bitcoin positions to support the UST price, which will accelerate the decline of Bitcoin. Analysts have pointed out that Luna Foundation Guard's bitcoin wallet is now completely empty. However, the group denied this, saying it had not tried to exit its bitcoin position.
Matt Hougan, chief investment officer of Bitwise Asset Management, told the financial media: "Nowadays, every professional investor in the cryptocurrency space has set their sights on UST to see if it can maintain its pegging to $1. There are clearly significant risks in the market. ”
Michael Safai, managing partner of Dexterity Capital, a cryptocurrency-focused quantitative trading firm, also said: "The longer this situation lasts, the greater the pressure on Bitcoin and the increase in investor anxiety. ”
Hendo Verbeek, head of quantitative trading at Faculty Group, believes that the biggest risk in the future will be that UST will once again decouple from $1, which will eventually force the Luna Foundation Guard to liquidate Bitcoin, which in turn could lead to further liquidation of "over-leveraged players" who try to take advantage of the UST-Luna spread arbitrage, "this nightmare scenario looks like the most likely outcome." ”
The Fed released its semi-annual Financial Stability Report on Monday, warning of stablecoins designed to be pegged to hard currencies such as the U.S. dollar, which could depreciate under pressure or lose their illiquid asset backing. These tokens are therefore "vulnerable to a run," and the lack of transparency in these assets could exacerbate these vulnerabilities:
"The increasing use of stablecoins to meet the margin requirements of leveraged trading in other cryptocurrencies may amplify the volatility of stablecoin demand and increase redemption risk."
The U.S. Treasury Also announced this week that Treasury Secretary Janet Yellen will attend a Senate hearing in Congress that the Financial Stability Regulatory Commission (FSOC) is trying to identify the risks that those digital assets will pose.
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