![]() Luna somehow crashed at the same time as UST, in what has been described by analysts as a "death spiral". It's basically like printing money out of thin air, through a complex mix of "smart contracts" - to make sure the value of each UST token stays as close as possible to $US1.īut the problem was that these complex algorithms somehow failed spectacularly. In theory, that's meant to keep the value of both stable. When Terra dips below $US1, it can be swapped for Luna tokens (at a small profit). However, Terra (UST) is an “algorithmic” stablecoin - whose value is backed by a "sister" token called Luna, which is run on pre-programmed "smart contracts". Most stablecoins are backed by cash reserves, and they're supposed to have enough liquid assets on hand to match the value of each coin. It was the equivalent of a crypto "bank run", as people rushed to pull their money out. Then it crashed again on Wednesday, bringing its value down to 20 US cents. ![]() Its value plunged from $US1 (where it was always meant to remain) to 60 US cents. But on Tuesday, a huge sell-off occurred as the value of the Terra stablecoin suddenly "unpegged" from the US dollar. Terra was one of the world's most valuable (and stable) digital currencies. In theory, they're meant to have a fixed value (around $US1) so they can be a reliable store of value - in contrast to the extreme volatility of bitcoin, ethereum and others. Stablecoins like UST, Tether and USDC are like bank accounts for the crypto ecosystem, and their value is usually pegged to fiat currencies like the US dollar (on 1:1 basis). Crypto bank runĪpart from those "big picture" economic factors, analysts say the crash of the TerraUSD "stablecoin" (or UST) - and its potential contagion effect - was the main reason behind this week's cryptocurrency sell-off. It comes as the US Federal Reserve (and central banks globally) hike interest rates aggressively - and remove trillions of dollars worth of COVID-19 stimulus, in a desperate bid to keep a lid on decades-high inflation. Lately, people have been dumping their riskier, speculative assets like crypto, tech stocks, and shares in companies which are still in their "growth" phase (and not paying dividends). The wider crypto market (which includes thousands of digital currencies and tokens) has seen its value plunge by more than 50 per cent since then. Bitcoin (which has often been touted as "digital gold" or a "hedge against inflation") plunged below $US25,500 this week - a far cry from the record high $US69,000 price tag it commanded back in November.
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