Terra (LUNA) Price Crash Analysis – What Exactly Happened?

Terra (LUNA) Price Crash Analysis – What Exactly Happened?

The price crash for Luna is one of the grimmest happenings in the recent crypto-verse. As of writing this article, Luna has fallen from its strong position of $118 in March 2022 to a mere $1.

Luna holders as of now have lost 98.85% of their capital if they invested in it at the peak price of $118 in March of this year.

Source: Trading View
Source: Trading View

Terra's ranking on Coinmarketcap has also dropped to 76th rank in terms of market capitalization which makes up for a very shocking fact for a project like Terra which used to be a constant among the Top 10 cryptocurrencies.

How does Luna and UST peg work?

To understand the situation better, you need to know how the UST peg works and is related to Luna. In a nutshell, every time a UST token is minted, $1 worth of Luna is burned and vice versa.

As stated in a recent article on fortune.com "when the price of UST drops below $1, traders are encouraged to burn UST, or remove it from circulation, and receive Luna tokens at a discounted rate.

Since there is less UST changing digital hands, the price should theoretically go up toward $1 again, maintaining the peg.

Suppose the price of UST exceeds $1. In that case, traders will be incentivized to burn Luna in exchange for a dollar in UST, which increases its supply and theoretically will eventually drop the price back to $1."

The Reason for Price Crash:

This cryptocurrency's price crash is mainly attributed to its algorithmic stablecoin-UST-losing its peg as a stablecoin and therefore creating a worst-case but anticipated death spiral for Luna and UST.

The problem is supposed to be at the root of UST deposit withdrawals from Anchor, one of the most dependent shoulders for UST in space. Due to the high rate of withdrawals failing the UST peg, the sister currency Luna has got caught in a death spiral featuring a 98% price crash.

The founder has spoken up:

Currently, the founder of Terra Foundation – Do Kwon has broken his silence in light of the brutal past 72 hours on LUNAtics and has proposed how to take care of the situation (but with a high cost to Luna and UST holders) in a Twitter thread on Wednesday afternoon.

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