Market Trend 9/5 - 15/5 ｜Stablecoins lose peg, LUNA crashes, Bitcoin drops under 30k

Last Market Trend publication showed the crypto ecosystem marked by growing concerns for the crypto market as Bitcoin, Ethereum and most importantly altcoins lost steam amid inflation remarks and 50 bps rate hikes coming from the Federal Reserve.

This previous week, however, the market shakeup was surprisingly all about stablecoins. The standout mover of all was undoubtedly the algorithmic stablecoin UST, which resulted in a project crash never before seen in the history of cryptocurrencies.

The next few days will certainly be of absolute caution, as both retail and high-level investors await a more steady trend in either volatile direction in order to plan their next move. It also doesn’t help that inflation continues to break records in the United States, adding to the market uncertainty.


UST loses peg, LUNA crashes 100%
Had anyone said merely a week ago that Terra, one of the biggest projects in crypto that once reached the #6 world ranking position, would be the source of the biggest crash in crypto history, they would probably be labelled as delusional.

But that is precisely what has happened; after growing concerns that UST’s algorithmic dollar peg was not sustainable due to very high APY rewards on Anchor Protocol, the nightmare began. Intense selling pressure caused UST to completely lose its peg down to mere 4 cents, while LUNA’s cooperative mint-and-burn programmed framework with UST caused new LUNA coins to be minted at an insane rate: 6.5 trillion LUNAs created in a week, to be more precise, dropping the once-leading DeFi project from $61 dollar per LUNA on Monday to a previously-inconceivable $0.000000999967 per LUNA in its recent lows.


Combined, we’re talking about a nearly $40 billion dollar complete market wipe-out in a matter of days, from two co-dependent projects involving the Terra Foundation. Since they were the leading and one of the most adored DeFi projects in the ecosystem, it didn’t take long for news to hit the world and bring even more fear into cryptocurrencies. If such a tragedy can happen to LUNA and UST, what might happen with [insert project here]?

As a result, selling pressure spread across crypto, with all altcoins taking the most damage but also bringing Bitcoin under $30k dollars once again - its lowest level since July of 2021.


Fear resulting from the Terra debacle will definitely continue as the project will hold its place as the key mover of market sentiment over the next few days. As of now, Terra has halted the minting of LUNA and continues to provide proposals for network updates. The project faces strong criticism for not addressing the millions of people who lost their funds, however, with media focused on founder Do Kwon who had not addressed recovery plans for investors. What comes next?


USDT loses peg briefly, and further panic ensues
If one major stablecoin losing its peg wasn’t enough to shake cryptocurrencies, crypto’s biggest stablecoin Tether (USDT) lost its peg last week and caused a major - but brief - market scare. Dropping from $1 to $0.95 for a few hours, USDT’s drop represented a bigger concern for overall investors due to the stablecoin’s nature. Contrary to UST, USDT is not an algorithmic stablecoin - it is officially fully backed by dollar vault reserves in the United States belonging to its founding company Tether in a total of $75 billion dollars.


However, Tether’s dollar reserves have always been a target of controversy. In a nutshell, it is believed that the funds being traded in exchanges across the globe, $75 billion, do not represent the real amount that Tether holds - which critics believe to be much lower.

It’s been argued that USDT briefly lost its peg due to intense selling pressure form UST rolling onto Tether, causing a sudden market break in value as retail investors panicked that perhaps all stablecoins could be plummetting their values. Since the scare, USDT has been steadily trading at $1 dollar again, and previous audits on Tether’s dollar reserves point to their funds being legitimate.

Regardless, most eyes this week will still be on the Terra Foundation and Tether. The worst seems to have passed for them, but the fear persists and many questions are still left unanswered. Crypto is experiencing a moment of immense instability where any negative development - stablecoins or not - can further drop the market into new year-lows. Therefore, extreme caution is advised.



Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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