The sudden fall of the Luna cryptocurrency evaporates the savings of thousands of investors and spreads the fear of contagion

Fear and anguish are the new companions of the once buoyant and daring market crypto. In 72 frantic hours, the more than 99% drop of Luna, one of the main digital currencies, and the stablecoin TerraUSD, to which it is linked, have spread doubts about the reliability of this type of asset in the midst of a panic stampede as fast as it is painful. The social network Twitter and the Reddit forum have immediately filled with messages from investors who have seen a good part of their savings evaporate in a flash. And on this last platform, widely used by small investors to talk about their operations in the financial markets, there is a proliferation of testimonies from those who claim to have lost tens of thousands and even hundreds of thousands of dollars in the crash, to the point that the moderators they have been forced to set the telephone numbers against suicide in each country at the beginning of the conversation.

The stablecoin —stable currency— TerraUSD, created by the Singapore-based company Terraform Labs, was conceived to maintain at all times, through algorithms, parity with the dollar, that is, the owner of a TerraUSD could always exchange it for a dollar, but that equivalence has been abruptly interrupted, to the point that it was worth only 23 cents before recovering somewhat. This phenomenon quickly affected Luna, its sister cryptocurrency, since the system with which it works rewards Lunas for TerraUSD when the latter is below the dollar, so that it recovers its price, something that is not happening. Instead, it is feared they are headed for what analysts call the death spiral —death spiral—, or what is the same, that they lose all their value —Luna was changing this Thursday at 28 cents compared to almost 100 dollars a couple of weeks ago—.

Its co-founder, South Korean Do Kwon, has tried to stabilize it by drawing on his huge bitcoin reserves. He used 750 million dollars in this cryptocurrency to protect the parity of the stable currency, but those efforts have so far been unsuccessful, so he has tried to calm the spirits of those affected, whom he has addressed through Twitter. “I understand that the last 72 hours have been extremely difficult for all of you. Know that I am determined to work with each of you to get through this crisis, and we will build our way out. Together”. he noted this Wednesday.

The reasons for the loss of parity with the dollar are not clear. Some attribute it to a coordinated attack to profit by betting on its fall, for which 300 million dollars of TerraUSD would have been sold in a matter of seconds.

The crash de Luna and TerraUSD has resurrected the worst ghosts of capitalism. Many compare its magnitude for the crypto universe with that of the bankruptcy of the investment bank Lehman Brothers in 2008 for the financial system, which forced the US authorities to deploy an immense firewall that included the rescue of several entities to prevent contagion. cause a further collapse.

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Bitcoin feels the impact

The loss of confidence has translated into further declines in bitcoin. The largest cryptocurrency, which its defenders cataloged as a new digital gold capable of resisting the blows of inflation, is worth just over 500,000 million dollars after leaving more than 20% in the last five days. And its size has been reduced to less than half in six months: a bitcoin is exchanged for 27,700 dollars when in November it was for about 68,000.

Also adding to the even steeper declines were many other smaller cryptocurrencies. And the American firm Coinbase, one of the most popular buying and selling platforms, experienced a new black day by losing 26% of its value this Wednesday. It thus accumulates more than an 80% drop in six months. The percentages are dizzying, but for those who are rushing to bury bitcoin and see the bubble burst close, its supporters remind them that it has resurfaced from worse crises in the past. Although history does not always repeat itself when it comes to markets.

In any case, the effects of such an earthquake for an ecosystem that intends to replace traditional money and decouple it from central banks are still unknown. It seems clear that it gives new arguments to the regulators who have been warning small investors for years that their high volatility makes them a high-risk asset that can imply the total loss of the investment. US Treasury Secretary Janet Yellen cited the case as an example of the need for proper regulation. “I think it illustrates that this is a fast growing product and there are risks to financial stability and we need a framework that is appropriate,” she told the Senate.

Canadian Changpeng Zhao, founder of Binance, the world’s largest cryptocurrency platform, called on investors to be cautious. “We are facing a new market with many innovations. Some will succeed, many won’t,” he stated on his Twitter account to his nearly six million followers. He also defended that the recurring criticism of the volatility of cryptocurrencies is not as harsh when it comes to fallen stocks, citing Netflix as an example, which has lost 72% of its stock value so far this year.

Meanwhile, on Reddit the messages fly and the compulsive price updates cast nothing but an intense red color on those who saw Luna and TerraUSD as a way to make money. “I have lost about $450,000. I can’t pay the bank. I will lose my house. I will become homeless. Suicide is the only way out for me”, says one of the multiple statements of pain that go through the forum, some of which have been deleted by the moderators due to their crudeness.

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