You’re probably aware that LUNA lost 99.99% of its value in a matter of days back in May. I think everyone involved in crypto knows this (unless they’ve been living in a colony on Mars). Terra Protocol and its two main tokens — UST and LUNA — went into cascading domino-like freefall as the (supposedly)carefully constructed protocol hit a snag — a BIG one!
To help understand what went down, it’s important to know about UST and LUNA’s relationship in the Terra ecosystem. UST is a stable coin but unlike USDT (Tether) or USDC, it’s not backed by cash, short-term US govt. securities, or commercially. UST is, at its basic level, an algorithmic stablecoin. It's supposed to maintain its peg to the USD through an intricate system of financial engineering — at least it’s designed to.
Terra is different because it uses an arbitrage function to maintain UST’s peg. The protocol has two pools: a LUNA pool and a UST pool. Each can be traded with the other. Meaning, that 1 UST can always be traded for $1 worth of LUNA.
Now if UST were to lose its peg and drop below $0.99, traders could trade a large quantity of it for LUNA worth $1 each, and earn a profit of $0.01 on every token traded. Traded UST would get burned which further reduced the supply and increased its price to $1.
Alternately, if UST’s value would rise above $1.01, traders could trade LUNA to create UST and earn a profit of $0.01 on every token traded. The UST supply would increase and the price would drop to $1 again. In addition, traded LUNA would get burned which would make it more valuable.
Finally, to incentivize traders to burn their LUNA and create UST, Terra was offering an insane 19.5% yield on UST staking through the Anchor Protocol. Before the crash — over 70% of UST’s circulating supply was staked in this protocol — OUCH!
Protecting the peg further, Terra founder Do Kwon created what was called the LFG, a non-profit that held a reserve fund of around $3 billion in BTC and other cryptos. LFG’s job was to keep UST from dipping below $1, and it would use its reserves to buy tokens and restore its peg.
If UST rose, they would sell some UST and bring it back to $1, the profit was used to replenish its reserves.
Sounds good — right? So, what the fuck went wrong
The cataclysmic downtrend started on May 7–8 and started to take a shit on Monday, May 9. Over $2 billion of UST was unstaked from Anchor Protocol and hundreds of millions were sold in a flash.
The titanic selling volume pushed UST’s price down to $0.91. Of course, traders rushed to buy the dip, trading $0.9 worth of UST for $1 worth of LUNA. But there was a huge problem! Only $100 million in UST can be burned for LUNA per day as designed by the protocol.
This resulted in UST not being able to retain its peg, investors flocked to sell their stock, and it drove prices down even further. This had a domino effect on the entire ecosystem and LUNA went to hell.
LFG quickly exhausted most of its reserves by trying to restore UST’s peg. Over $1 billion in BTC was sold, which triggered a MASSIVE sell-off and affected the entire crypto market. Billions of dollars in crypto value vanished within a few days.
Aug 13-20- Many Blue Chip NFTs Were in Danger of Getting Liquidated Due to Leveraging
The NFT lending platform, BendDAO collateralized almost 3% of the whole Boed Ape collection. As a result, many NFTs recently entered the “danger zone” of liquidation.
The NFT market was highly inflated and the crypto space has been tanking ... no doubt this would lead the NFT market into a situation where, although NFTs may not be dead, they certainly won't continue at the insane values of the past.
But ..what about cryptocurrency? Is this the end?
It's HIGHLY unlikely, in my opinion.
I believe in this downtrend, just like all the others, Bitcoin veterans will profit from it.
Most bitcoin veterans continue to buy Bitcoin in a Dollar-Cost Average (DCA) investment system
Bitcoin Veterans are the earliest to react and “buy the dip” because they understand that the price trend has constantly climbed whenever bitcoin crashes.
Bitcoin didn’t die on both of the above occasions and hadn’t died on any other occasion, a fact that echoes amongst the Bitcoin Veterans and the reason for their slogan to “buy the dip.”
The takeaway
There is no best point in time for buying Bitcoin.
For instance, those who wait for a dip might miss the bus while Bitcoin realizes double-digit profits for several months, and, on the other hand, those who instantly buy might see prices crash for a short time.
The point is, long-term, it doesn’t matter when you bought Bitcoin but only whether or not you did.
DCA is your best friend in a highly volatile market like crypto.
Altcoins may never compare to the big papa of crypto — Bitcoin.
