Cryptocurrency TerraUSD Falls Below Fixed Value, Triggering Selloff
Categories: Crypto News US
One type of cryptocurrency, a so-called stablecoin, is meant to keep its value at $1. But on Monday, the third-biggest stablecoin, TerraUSD, fell as low as 69 cents, causing a flood of investors to sell their holdings.Stablecoins get their name from their being tied to the value of government-issued currencies, such as the dollar. These $1 pegs are usually backed by Treasurys, cash and other dollar debt that is easily sold in times of market stress.Such designs have been criticized by market observers as risky because they rely on traders to push the value back to $1 rather than having assets that continuously support the price. If traders aren’t willing to buy them, coins can go into a so-called death spiral. TerraUSD has mostly maintained its dollar peg, but it has been broken in bouts of heavy volatility. The break in the peg, which began over the weekend, started with a series of large withdrawals of TerraUSD from Anchor Protocol, a sort of decentralized bank for crypto investors, said Ilan Solot, a partner at crypto hedge fund Tagus Capital LLP. Anchor Protocol—which is built on the technology of the same Terra blockchain network that TerraUSD is based on—had been a major factor in the growth of the stablecoin in recent months, by allowing crypto investors to earn returns of nearly 20% annually by lending out their TerraUSD holdings.In tandem with the big withdrawals, TerraUSD was also being sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges. TerraUSD in Monday evening trading was at about 80 cents, after touching the low of 69 cents earlier, according to CoinMarketCap. Panic selling also hit the related Luna cryptocurrency, which plunged 50% from Sunday to Monday, wiping out more than $10 billion of market value, CoinMarketCap data show.The Luna Foundation Guard, a nonprofit supporting Terra, said it voted to support TerraUSD by lending $750 million of bitcoin to trading firms to protect the stablecoin’s peg and lending out an additional 750 million in TerraUSD to buy more bitcoin.The selloff might have stemmed from someone or a group of people trying to break the peg, Mr. Solot of Tagus Capital said. Regardless of the cause, he doesn’t expect TerraUSD to return to $1 immediately since a queue of sell orders are still waiting to be processed.