Why Did Cryptocurrency LUNA Crashed?

by Anne B. Robinson

There’s been a lot of news in 2022 about the future of crypto, but no one expected that some stable coins would have a tough time. This shook the whole community, but it didn’t stop them from keeping investing in other alternatives. BTC dropped a lot in May, over 50%, but it stopped at $29k, so it should go up in the next couple of months.

Some people are looking for the best online casino to spend what is left, but crashes have happened before, and cryptocurrencies still exist. Investors are also a big reason why the price dropped, but the panic doesn’t have a great excuse.

You can blame the crash because it was poorly regulated or not regulated at all. The governments are working very slowly on this matter but having virtual currency will definitely happen at some point.

Are Stable Coins Stable?

These coins are made so they represent a fiat currency like the US dollar. The goal of having this type of crypto is to have a coin that won’t fluctuate like others. You won’t have ups and downs on a daily basis, so it’s great for a number of purposes.

It’s very useful when you are about to make a few changes in your investing portfolio. You would buy a stable coin and keep it while you make the decision on what to do and where to invest. Everyone understands the value of $1, so an ordinary person will know what to do with it.

Tether is one of the most popular stable coins, and it was created after the release of CoinBase. This means that it has been here for a while, and it was very useful for everyone that traded with crypto. This coin should always have the same value of $1, but things changed in 2022.

What Happened With LUNA?

Besides being backed up by assets or the US dollar, there are some coins that rely on algorithms to maintain their value. These coins are connected to another coin which helps them maintain their value.

For example, TerraUSD is a stable coin, and it’s related to LUNA, which won’t have the same value always.

The way this mechanism works is by burning one to get the other. For 1 Terra burned, you will get 1 dollar worth of LUNA, and when you want to sell $1 of LUNA, you will get 1 Terra.

But, a lot of bad things can happen if the price drops only 1 cent because you can earn that 1 cent by trading in between the coins.

This is what was happening in May of 2022 when a lot of people were looking to make a quick buck. But, this ends up reducing the supply of Terra, but things can happen the other way around. So, people that had LUNA realized that they could earn a quick buck by trending against Terra, which is $1.01.

What Were The Results of Trading?

One thing that Terra had but other coins didn’t is the 20% interest investors get for keeping the coin. These coins had to be in an Anchor account which works like a savings account. One small change turned out to be a disaster where some people decided that instead of 20% interest, it would be variable.

As soon as this happened, people started pulling their money out of the Anchor accounts. These were big accounts with a lot of investments which made other small investors try to burn Terra for LUNA.

This actually pushed LUNA out of the picture because there wasn’t any balance between the two coins.

Both coins crashed, and the stable coins weren’t stable for some time because they dropped to less than $0.50. A lot of people were blaming Do Kwon, the creator of both coins, but no matter who people blamed, the damage had been done.

This didn’t only affect these two coins, but every price dropped, even BTC.

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