Stablecoin Terra USD drops from $ 1 to $ 0.16. This violent crash has an impact on the entire crypto market, especially on the best known of all currencies – Bitcoin. Many people have lost a lot of money as a result.
How did the collapse occur? Are there responsible people? What are the implications for the crypto market? Should we expect more crashes in the future? And if so, how can this possibly be prevented?
This is how the collapse happened
UST is Terra USD stablecoins in Terra Network. Terra also carries a token called LUNA. The system relies on a market algorithm that creates a connection between the LUNA token and the US dollar. This is intended to keep the price of UST exactly at one US dollar at all times.
At first, there were only rumors that certain U.S. hedge funds were buying a lot of UST through over-the-counter trading, so-called OTC deals. By acquiring the many stack coins, they probably wanted to become part of the ecosystem. The rumors resulted in lots of UST being dumped on the market. As a result, more and more LUNA tokens had to be created to keep the price down. A chain reaction followed. Due to the constantly declining value, many investors have now sold their stack coins again.
As a result, both the stablecoin UST and the LUNA token suffered a crash. The Terra Foundation wanted to do something about it and tried to save UST with their own bitcoin reserves. As a result, the value of bitcoin fell, as did LUNA and UST before. Due to the massive flood of coins, a reversal occurred in the BTC market as well as in the entire crypto market.
The difference to funded stack coins
As already mentioned, Terra relies on an algorithm that connects LUNA and Dollar and ensures that the price remains the same. By either printing or burning LUNA coins, the goal is to keep the value of UST at one dollar. This should ensure a stable market. In recent times, however, it has been shown that this has only temporary success. If there are major market movements, the value cannot adapt as quickly and in the worst case ends up in hyperinflation.
In contrast, a stablecoin like Theter (USDT) is backed by capital. This can ensure more security. Because for every existing minted dollar, a real dollar is deposited in a bank account. This can and should be checked regularly. Major market movements may even be mitigated if a stable currency such as the USDT suffers from a fall.
The recent incident has shown that any stablecoin should be supported by something genuine. Theter is a good role model for this. Security token offers can provide additional protection in the crypto market. With STOs, stack coins are covered by fixed assets, such as real estate, securities or loans. Companies have the ability to convert their shares into digital tokens and then put them up for sale.
Investors should prepare adequately
Many people are now investing in cryptocurrencies. This does not only include wealthy private investors or companies. They see an opportunity in the future to be able to generate a lot of money with the purchased coins. The cryptocurrency market crash has cost some people a lot of money. Investors who have bought a lot of Terra USD can now no longer prove that their assets are too high.
Terra Foundation has not learned much from its mistakes and crashes the course after it reappears. First of all, stablecoin should recover. Terra blockchain was shut down after the crash of UST. But it had no effect. Stablecoin did not recover as expected.
Investors should learn from the crack in cryptocurrencies. Adequate research should be conducted before investing in cryptocurrencies and especially in stack coins. For example, one should be aware of the difference between supported and algorithmic stack coins. If you are still interested in algorithmic stack coins after that, you should look at the algorithm before investing. Algorithms are usually public and can be viewed online. This reduces the risk of unknowingly investing in coins that can go down quickly. If you had looked at UST’s algorithm before you bought it, you could have guessed the danger and reconsidered the purchase. Additionally, the fact that you can simply turn off a blockchain could have been an indication of the existing danger. For Terra USD buyers, investing in a supported stablecoin like Theter would certainly have been a better alternative.
The collapse of the stablecoin Terra USD had a drastic impact on the entire crypto market. It is meant as a warning and lesson for investors to be sure to do enough research before buying crypto. Funded stack coins and hedging through STOs are better alternatives to investing. Stablecoins should always be supported by real value. This reduces the risk of major market crashes. Going forward, it is very likely that the crypto market will return from the crash. However, one can never be sure of a new collapse. Investors should be aware that there will always be risk in market movements. The question is just how well prepared you will be in the future.