Stablecoin TerraUSD Continues Downward Spiral; Bitcoin Gains
The largest cryptocurrencies have shown signs of recovering from a sell-off that lasted about a week, while the supposed stablecoin TerraUSD continues to fall.
Bitcoin was up 7.2% on Friday from ET levels at 5pm Thursday, trading at $30,640.14, after dipping below $26,000 on Thursday. Ether, the second largest cryptocurrency by market value, is up 9.9%.
TerraUSD dropped to 10 cents early Friday, having dropped 82% in the past 24 hours, according to CoinDesk. The former third-largest stablecoin — a cryptocurrency known for its stability — has dropped in price by $1 following a wave of selling that began over the weekend. Its drop caused its sister token, Luna, to follow suit and weigh on bitcoin. Luna dropped to half a cent on Friday, down from more than $60 on Monday.
Blockchain Platform TerraUSD and Luna has been paused twice as its network validators seek to stabilize digital assets. Binance, the largest cryptocurrency exchange by volume, suspend trading of both TerraUSD and Luna by the end of Thursday.
“We feel that suspending trading is the best way to protect our users at this time,” said Binance CEO Changpeng Zhao. Twitter on Friday.
Stablecoins have grown in popularity over the past two years and now serve as a lubricant that moves the gears of the cryptocurrency ecosystem. Traders like to buy currencies like bitcoin, ether, and dogecoin using digital assets pegged to the dollar because when they buy or sell, the price only moves in one direction. They also allow for fast transactions with no settlement time associated with government-issued currency, which can take days.
While the most popular stablecoins maintain their level with assets including dollar-denominated debt and cash, TerraUSD is an algorithm-based stablecoin that relies on financial engineering to stay linked to the dollar. la.
Previously, TerraUSD maintained its $1 price by relying on traders as its fulcrum. When it falls below the peg, traders will burn the stablecoin – removing it from circulation – by exchanging TerraUSD for $1 worth of new Luna units. That action reduced the supply of TerraUSD and increased its price.
Conversely, when the value of TerraUSD rises above $1, traders can burn Luna and create new TerraUSD, thereby increasing the stablecoin supply and reducing its price back to $1.
The financial engineering to maintain its rate began to falter over the weekend with a series of large TerraUSD withdrawals from Anchor Protocol, a kind of decentralized banking for crypto investors.
Meanwhile, TerraUSD has been sold for stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the exchange rate, as well as through cryptocurrency exchanges. This sudden outflow caused some traders to start selling TerraUSD and Luna panicking.
According to the fund’s data dashboard, the reserve fund worth about $3 billion in bitcoin and other crypto-resources, owned by the Luna Foundation Guard, has been largely depleted amid an emergency effort to pick up TerraUSD. Analysts and traders say the fund’s selling contributed to the sharp drop in bitcoin’s price earlier this week.
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