What a slap: in less than a week 300 billion dollars, more or less half of the entire Italian Stock Exchange, went up in smoke due to the collapse in the value of cryptocurrencies, an earthquake triggered by the crisis of LandUSD up to involve the whole planet of alternative currencies, including the Bitcoin which left 60% of its value on the ground before starting a timid increase this morning.
This is nothing new: in 2018 the virtual currency had lost 80% before restarting. But then Bitcoin was a kind of rarity, the prerogative of a few privateers, often active on the borderline between lawful activities and borderline initiatives. Today, judging by the Pew Research report reported by the New York Times, the weight of the crypto economy it is quite different: 15% of Americans who own publicly traded stocks have invested something in bitcoin, Tether or other cryptocurrencies. A phenomenon that has gained speed with the pandemic thanks to Washington's support for families and the example of Elon Musk or other billionaires who, with strong personal profits, have acted as testimonials for Dodgecoin or other initiatives. Finally, the belief that cryptocurrencies are an effective hedge against inflation took root. Alas, the thesis has not stood up to comparison with the real world: the increase in rates has affected crypto levels as well as all risky assets, starting with the Nasdaq.
Terra Usd and the Luna foundation: what went wrong
But these valuations have little to do with the dramatic fall of TerraUsd, the stablecoin at the origin of the incredible collapse, apparently triggered by a bug, the most expensive system bug in financial history. At the origin of the sting, in fact, there is the parabola of Terra Usd (or Ust), the tenth largest in the world, fruit of the genius of Do Kwon, its creator who had finally found the squaring of the circle;: to guarantee the stability of the cryptocurrency by pegging it to the dollar. At no cost, moreover because the stability of the system is guaranteed by a series of algorithms capable of activating coverage when necessary through the use of a token (a token of cryptocurrency) called Luna, owned by a foundation. In short, those who want to speculate on alternative currencies can do so with a parachute, limiting the risk. But it didn't go like this: the parity with the dollar went up in smoke, to the point that the TerraUsd slipped down to 23 cents. Let's try to understand why.
Bitcoin stumbled upon a colossal speculation
Basically, according to the rules, the Luna Foundation enters the field only when necessary, with the least expenditure of energy: last Monday, the parent company announced that it would defend its link with the US currency with a series of loans of 1,5 billions of dollars, to over-the-counter trading companies. Half of the amount, however, was transferred to Bitcoin, the rest in TerraUsd. But in this way a vicious circle was triggered, as Justin d'Anethan, an analyst at Amber Group, explains to Reuters: the use of bitcoin as a reserve asset has created a "vicious circle" for TerraUSD, causing sales of both cryptocurrencies favored the mutual lowering of value. All without moving a single dollar, too. A colossal speculation favored by some shareholders of the stable coin, such as Anchor, who last week raised more than 14 billion dollars by offering 20% interest to those investing in loans to TerraUsd. A Ponzi scheme that didn't last even a week: exploiting a bug in the system, sales raged on Luna's shares, which fell from $119 a week ago to just over zero. A disaster that involved other platforms, generating a domino effect that affected the entire stablecoin ecosystem.
A small big earthquake that probably explains a good part the stop of Elon Musk to the acquisition of Twitter. It will not be the only effect of a crisis that has just begun (this morning Terra Usd was suspended again by the promoters who are trying to understand the depth of the damage). It's easy to predict that the wounds will be felt for quite a while.
