Bitcoin, the world’s largest cryptocurrency, has fallen more than 50% since hitting an all-time high of nearly $69,000 in November.
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The two main tokens of the embattled Terra crypto project are now in freefall.
UST, a so-called stablecoin meant to maintain a $1 peg, plunged to 31 cents on Wednesday. It was last trading at less than 50 cents, according to data from CoinGecko.
Sister token Luna plunged over 80% to $5.10.
Bitcoin and Ether saw more muted moves. Bitcoin fell 2% to around 31,169 while Ether fell 1% to $2,365.
Stablecoins are akin to bank accounts for the crypto economy, providing a solid store of value to avoid the kind of volatility that cryptocurrencies like bitcoin have become notorious for — in theory, at least.
UST is what is called an “algorithmic” stablecoin. It uses a complex token minting and burning system to adjust supply and stabilize prices. The price of UST recently crashed under pressure from a cryptocurrency sell-off, leading to further panic in the market.
Do Kwon, the creator of the coin, raised billions of dollars worth of bitcoins through his Luna Foundation Guard fund to support the UST in times of crisis. The fear now is that Luna Foundation Guard will throw these bitcoins into the market, leading to an even bigger sell-off.
Bitcoin briefly fell below $30,000 on Monday evening, its lowest price since July 2021. The world’s largest digital coin now sits slightly above that level. It has fallen around 56% since hitting an all-time high of nearly $69,000 in November.
David Moreno Darocas, research analyst at CryptoCompare, said the situation highlights the “fragility” of algorithmic stablecoins like UST.
“UST has become both an integral and controversial part of the crypto ecosystem,” he said.
The phenomenon is still relatively new. But UST has become a major player in the crypto economy, with a circulating supply of 16 billion tokens.
Investors are now closely watching the reaction of Luna Foundation Guard to support its struggling stablecoin. Kwon said on Tuesday that he was “close to announcing a stimulus package” for UST. “Hold on tight,” he tweeted.