LUNA has dropped by over 98 per cent in the past seven days and is currently trading at around $2. The latest development has resulted in a sell-off frenzy from investors of the cryptocurrency.
However, for people who have been paying attention to recent events of LUNA and UST, the drop has not caught them by surprise. On Saturday signs were already starting to unfold, as Terra US dollar stable coin fell to 98 cents. The expectation was they would use their $2.6 billion bitcoin asset to help the stablecoin stabilize and start trading at a ratio of 1:1 with the US dollar. However, that was not the case. By Monday, the price of UST had fallen to 95 cents.
Now, while in many instances such a drop would not affect other cryptocurrencies, UST is an algorithmic stable coin whose supply expands by burning LUNA. This means that the two digital assets are tied together. When the prices of UST fall below a dollar, LUNA is minted to stabilize the stablecoin. Therefore, when the market grows, the supply of LUNA shrinks, which puts upward pressure on LUNA’s price.
The problem, which started on May 7th, when $85 million UST was transferred from Terra blockchain through the Wormhole Bridge to Ethereum, was exacerbated on Monday when the prices of UST continued to fall. With strong ties to LUNA, which started to become impossible to mint to meet the ratio, UST dropped to 95 cents. Since then, UST continued to fall, and in the past few trading session, UST gave in and started dropping aggressively. downwards. Being tied to LUNA meant the cryptocurrency also started to fall. This resulted in the current 98 per cent drop.
Will LUNA Recover?
Now that we have the background of why LUNA has dropped by more than 98 per cent, the question still remains whether the cryptocurrency will recover. from afar, the cryptocurrency looks done and dusted, with many experts showing doubts of recovery for LUNA.
However, there is a good chance that we can start seeing LUNA recovering. The founder of the Terra project, which is the parent project of both LUNA and UST has already expressed support for community solutions to address the UST peg. Recovery of the UST will be the first step to addressing the current price drop of LUNA.
The next step is on whether investors will come back after the latest Fiasco that has likely resulted in millions of dollars in losses. However, until the past few days, Terra LUNA had been one of the best performing projects. If it weren’t for the problems with UST, LUNA would still be performing exemplary in the markets. Therefore, if the project can show how they plan to address the problems with UST, then it is likely that investors will start to flock in.
The third issue is the algorithmic relationship with UST. For LUNA to recover, they will need to address the problem and show clearly that such a drop will not happen again. As an analyst, I expect to see a bump in LUNA prices after UST is pegged back to the dollar. I also expect the prices to start recovering after the Terra project shows that similar problems will not happen in the future.