TerraUSD’s (UST) and
Luna’s crash is perhaps one of the most unexpected events in the cryptocurrency
market. While there was a lot of optimism about Luna’s future and the
ecosystem, the Terra venture still somehow nearly ended.
Seeing what happened,
now may be an excellent time to reexamine any expectations you have about
stablecoins. So here are four lessons to note from the collapse of UST and
Luna.
Crashes are Almost
Immediate
Being an algorithmic
stablecoin, the UST is pegged to the value of a steadier asset, the greenback.
However, that peg broke when the market was in a downtrend, pushing its value
as low as 4 cents. And since the UST has a strong correlation with Luna, its
sister token also lost around 90% of its value.
That slump occurred
only in hours, and some investors could not have enough time to make their
exit. That is why being alert and ready is crucial when you’re faced with
events such as this. One good move is to use stop-loss and take-profit orders
on your open positions.
Stable Reserves are
Vital
Stablecoins aims to
provide the benefits of the cryptocurrency’s speed and decentralization and the
fiat currency’s stability in value. However, the well-known stablecoins today
don’t follow a completely decentralized model.
Meanwhile, UST is an
algorithmic stablecoin that uses an alternative model. Instead of dollars
backing the token, the model made UST programmatically supported by the crypto
Luna.
UST holders can always
exchange their stablecoin for a dollar worth of newly minted Luna. Conversely,
investors can redeem their Luna holdings for a UST equal to the dollar value of
Luna redeemed.
That system resulted in
arbitrage incentives like the USDT that regularly redirected the stablecoin’s
market price to one dollar.
However, UST’s
stability and liquidity were not as strong as the real dollar. If many UST
holders were to exchange their holdings simultaneously, Luna’s value could take
a steep dive after exchanges were swamped with a great deal of supply. That,
unfortunately, is what exactly happened this month.
The UST could have
avoided such a situation if it was supported by an asset with a more robust
market and less unstable value when pressured.
Major Crypto Players
Can Still Fail
The UST’s and Luna’s
crash supports that cryptocurrency assets remain highly risky. While cryptos
like Bitcoin, Ethereum, and Cardano are already significantly valuable, they
still carry a lot of risks.
Like other assets,
cryptocurrencies are not entirely safe. Technical malfunctions, hacks, or
conflicts can disrupt the crypto market. As a result, even major crypto players
are at risk of experiencing sharp declines and losing their credibility.
Choose Value Over Hype
UST’s and Luna’s
misfortune proves that several professional investors don’t have much helpful
information about what is safe and not in the cryptocurrency space.
The reliability of an
investment is not based on its market value. While the majority is going where
the money is, that doesn’t mean you should do the same. Remember, using due
diligence is crucial.
UST failed due to a
flawed arbitrage mechanism that nearly everyone can analyze from the start.
Previous coins that used similar mechanisms were tested and failed several
years ago. That information, however, did not concern most investors.
So when they had the
chance to leave before the collapse took place, many investors could not do
their research and make the necessary preparations.
This article was written by ForexLive at www.forexlive.com.
