Do you know what happened with the Terra Luna coin? Mid-May 2022 marked a scary point for many cryptocurrency traders. Countless digital coins plunged to 2022 lows. Billions of dollars were lost. None more than the stable coin Terra USD and its sister coin Luna. They are part of Singapore-based company Terraform Labs, led by CEO Mr Do Kwon and co-founder Daniel Shin.
Terra/Luna Coin Story
The company was formed in 2018. It is believed that the founders are at the source of the crash that happened earlier this month.
This isn’t the first time there is a crypto crash, but this is the closest we’ve come to a specific coin getting wiped out.
Many investors spoke on social media platforms, especially the subreddit r/TerraLuna, about their losses and fear for their finances due to the collapse.
To understand what happened, we need to understand the difference between cryptocurrencies and stablecoins. Let’s shed some light on the subject.
Before we get into the TerraLabs story, who are Do Know and Daniel Shin? Kwon used to work for Microsoft and Apple.
Shin is the founder of payment company Chai, which has 2M users in South Korea, and the e-commerce website Ticket Monster (TMON).
Together, they created TerraLabs in 2018. What was the goal of the company? To become a leading e-commerce platform and decentralized finance (DeFi) service provider.
Stable Coin vs Cryptocurrency
What is the difference between a regular crypto and a stable coin? Let’s take Bitcoin or Ethereum as crypto examples.
They are mined and exchanged on various platforms. The coins are highly volatile and almost anything can affect their price. When China made Bitcoin mining illegal, the price spiraled down.
When Elon Musk tweeted about Dogecoin, the price went to the moon. In some cases to limit supply, there is a maximum quantity that can be mined.
On the other hand, stable coins are supposed to remove volatility and major price swings. Investors who want to transact using blockchain technology to remain anonymous while avoiding volatility use stable coins.
To accomplish that, the value is pegged to an asset such as a currency or bonds or to an algorithm. The biggest stable coin is Tether.
It is pegged to the US Dollar 1-for-1 thanks to US short-term securities and other riskier assets such as commercial paper. Theoretically, one Tether should always be worth $1 USD.
Terra/Luna in Detail
In TerraUSD’s case, it was pegged to an algorithm and uses financial engineering techniques to remain pegged to the US Dollar. Other variations of the coin are pegged to other currencies. It sounds complicated, and it is. It is done thanks to its sister coin Luna. When Terra’s value is above $1, the algo burns Luna to create Terra USD. The supply of Luna drops and increases its price. This is what drives Luna’s price up. Conversely, when Terra falls below $1, it is burned and exchanged for Luna. This drives Luna’s price down. Ultimately, users can use the coin as a method of payment when converting it into its currency.
Terra was pegged to the currencies thanks to an algorithm, but what was it backed by? Mr Kwon purchased $3.5B of Bitcoin in case of emergency. $1B of Bitcoin was since lent out and is still missing. On May 9th, when the price of Terra/Luna began to drop. Some described it as a Ponzi scheme, others claimed manipulation and fraud. What actually happened?
In April this year, the Luna coin hit a high of $116. Since then, the price slowly dropped. On May 9th, the price started dropping much quicker.
By May 12th, it was worth less than $1. As I am writing this, 1 Luna is worth 0.0001 USD. It went from one of the most valuable cryptos with a market cap of $40B to almost nothing.
So how did the price drop so quickly? During the weekend of May 7th, more than 90% of deposits from the Anchor platform were withdrawn.
Anchor was a crypto bank which held $14B of Terra USD. Some believe the sudden drop was due to a malicious attack on the coin by a third party. Investors reacted by selling their share of coins.
There is only about $1.6B left. Interestingly enough, some are still buying large quantities with the hope it will go back up. Weeks after the drop, there still is no concrete answer about what happened. The algo couldn’t fix the issue of balancing both coins and even shut down twice.
Remember the $3.5B in Bitcoin? That reserve was largely depleted to help the coin. The sale of bitcoin spread to other cryptos.
Terra/Luna Coin Revival?
First, Kwon’s response was to inject 1B coins into the system to attempt a revival. This plan failed. Next, he proposed a plan to fork the existing blockchain. This means there will be a second coin created with a few changes.
More Luna tokens will be added to compensate existing investors. However, these coins are almost worthless. The supply xTupled. Think of this as printing money and distributing it to everyone. Inflation is created and the money loses its value.
As for the remaining Bitcoin reserves, they are almost depleted. It seems that this coin is truly dead. Mr. Kwon is being investigated for his actions. Court documents show he dissolved TerraLabs days before the crash. His relevancy seems to be gone for good.
Once the price of Bitcoin dropped, other cryptos followed suit. Hundreds of billions of dollars of crypto value were shed that week. Many crypto fans lost faith in their favourite digital coin following the crash of Terra/Luna. Many are beginning to realize that it can happen to any coin.
Impact on Other Cryptocurrencies
What happens when billions of dollars are wiped out? Regulators come in. US legislators, both Democrats and Republicans, might soon decide on a plan of action. This isn’t the first or the last time a crypto asset fell apart.
It is still uncertain what legislation can be put in place to limit the danger of a crypto crash. Blockchain technology is made to be unregulated and untraceable. One of the possible outcomes can be the termination of many digital coins that are useless and have no value whatsoever.
Worst case scenario, many investors lose faith in this industry and billions are wiped out. Some countries completely banned crypto transactions and mining. They might argue that if investors aren’t willing to protect themselves and the economy then the government should decide what’s best.
Many crypto stocks have been heavily affected by this year’s selloff. Many coins are at a 12-month low and keep losing value every day. Since crypto stocks are heavily correlated with the performance of many coins, they are also suffering.
When we look at Coinbase (NASDAQ: COIN), they are currently at an all-time low. The platform also has a duty to its shareholders and users. I know performing due diligence on all the coins around isn’t easy. However, they can’t allow anyone to start a coin and take people’s money.
What about mining stocks? They are responsible for mining various coins such as Bitcoin, Ethereum and others. They are also on a free fall. When we look at Riot Blockchain (NASDAQ: RIOT), Hut8 Mining (NASDAQ: HUT) and others, their price is taking a serious hit.
TerraLab’s breakdown can send a wave of selloffs across many useless cryptos. First on the list is Dogecoin.
Its only uses are tips on Twitter and Reddit. Otherwise, it was created as a joke.
Some merchants accept it as a form of payment. However, the coin has no use or project behind it.
Believe it or not, when a coin is created with absolutely no use or objective, it is coined the term shitcoin. A special consideration to the founders of Useless Ethereum Token, TitCoin, TrumpCoin, PutinCoin and my favorite, Bananacoin. The latter is pegged to the price of 1kg of bananas.
Terra/Luna Coin Final Words
To conclude, I want to remind investors that cryptocurrencies are in large part a scam. If this example doesn’t change your mind, I don’t know what will. Their main use is to conduct anonymous transactions and make a quick buck on the stock market.
Until they are regulated, which is kind of counterintuitive for their purpose, more negative than positive will happen. For those who went on the subreddit mentioned earlier and read some stories, please don’t invest your life’s work into a crypto you read two lines about.
If you do, set some limits like for a stock. Follow a strategy and get out. Don’t be greedy.
If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.