Investors were shocked by the Terra LUNA market crash that occurred last month. The crypto market generally crashed the previous month, but the 80% deep dive in Terra wasn’t funny. Investor panic to get out of the crypto crash accelerated the decline of many coins. In general, the loss to crypto markets was $400 billion within a matter of days.
Surprisingly, new data has been released showing that Terra was being bought by retailers while Whales were selling off their stock. Terra investor, who made this report, said that smaller wallets were buying Terra amid panic.
Recent findings revealed that there were many swaps and withdrawals. Most of the outflows were going on Terra’s Anchor Protocol during the early days of the crash in May.
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There was a lot of pain after the Terra crash. Jake Chervinsky (Policy head, Blockchain Association), said the Terra crash week was the worst in crypto history.
There are many reasons Terra Crash can occur
Numerous theories have been put forth about why the crash occurred. But one glaring reason is the operations of the Terra’s Anchor Protocol. According to how stablecoins operate, they’re backed by reserves which should always be adequate to pay off investors even if they all pull out at the same time.
UST can be described as a stablecoin, which operates using algorithms that rely on code. To work, this coin requires continuous market activity and the belief it’s pegged to dollars. People trusted that the coin was linked to its base currency, LUNA.
Investors rushed to take advantage of the huge opportunity when Anchor Protocol (owned by Terra) offered a 20% return for lending six months back.
As all investors were looking for 20% returns, the UST saw massive investments. Many critics considered it to be a Ponzi scheme. Even Terra members admitted it, but claimed it was an attempt to raise awareness about the protocol.
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Many large investors chose to sell their investment to profit from short-selling, and many did. UST was depreciated from the USD as a consequence. A panicked population wanted their earned interest before the next crash. Luna also suffered from this bank-run, with UST dropping to 12c and Luna falling to fractions.
One other reason for the Terra crash might be attributed to the crypto sentiment that was going on following the Federal Reserve’s rate increase. Inflation was another factor that affected the market.
There were many issues and investors were worried about crypto investment prospects. Terra Luna’s crash also facilitated the already tethering crypto market crash.
Even the attempts by small depositors to increase their holdings on Anchor didn’t work because their overall liquidity is just a fraction of what is needed on the protocol.
Featured Image from Pixabay. Chart by TradingView.com