Cryptocurrencies crater as Terra collapses with Luna losing almost 100% of its value

UST, which lost its peg to the US dollar, crashed to 20 US cents on May 11. PHOTO: AFP

NEW YORK (BLOOMBERG) - Cryptocurrencies extended their slide on Thursday (May 12) after a brief attempt at recovery, as the collapse of the TerraUSD stablecoin triggered a stampede out of many of the digital asset market’s most popular tokens.

The company behind TerraUSD, Terraform Labs, was set up in Singapore in April 2018.

TerraUSD, or UST, which lost its US dollar peg, crashed to 20 US cents on Wednesday, taking its market value down from US$18.4 billion (S$25.7 billion) to US$5 billion. It was trading at 36 US cents at 6.10pm Singapore time on Thursday.

UST-affiliated token Luna plunged by about 95 per cent on Wednesday and continued to erase its value on Thursday. By 6.10pm Singapore time, it was trading at 6.12 US cents, 99.9 per cent below its all-time high of US$119.18 hit just last month.

Bitcoin, the world’s largest cryptocurrency,  was caught in the fire-sale of risky crypto assets as it fell another 8 per cent to US$26,570, having been near US$40,000 just a week ago and almost US$70,000 just last November.  In the last eight sessions, it has lost a third of its value, or US$13,000.

Tokens like Avalanche and Solana, which underpin some key decentralised finance (DeFi) protocols like TerraUSD, also extended their declines. Earlier, they had posted double-digit percentage gains but the rally fizzled.

“UST’s collapse undercuts confidence in all liquidity protocols,” said Mr Aaron Brown, a crypto investor who writes for Bloomberg Opinion. 

"If UST can fail, maybe Aave can too. Sort of like when (investment bank) Bear Stearns failed, it focused people's attention on whether Lehman would fail."

Backers of TerraUSD coin are reportedly struggling to win investor support for a rescue by raising about US$1.5 billion to shore up the token after it crashed from its US dollar peg. Talks stalled after big-name firms were approached by various individuals with connections to Terraform Labs in recent days, according to sources. 

Terraform Labs co-founder and chief executive Do Kwon repeatedly alluded on Twitter to recovery efforts, saying on May 10 that he was “getting close” and encouraging his followers to “stay strong”. Mr Kwon did not respond to a request for comment.  

"Is the market getting spooked by what is happening with Terra? The answer is yes," said Mr Craig Johnson, chief market technician at Piper Sandler. "Money market funds are important to investors and right now, we are questioning the third-largest money market fund in crypto land. People did not think we were going to break the buck on that and that has clearly happened."

Technicians say Bitcoin now needs to hold at US$28,000 - a break below that level could start a new wave of selling.

TerraUSD's troubles have been the dominant story in finance all week.

"The breaking of an inadequately robust or collateralised protocol is destroying value," said Mr Hugo Rogers, chief investment officer at Deltec Bank & Trust. "And this is having knock-on effects."

Sentiment was also crushed after data showed that United States consumer prices rose by more than forecast in April, indicating that inflation will persist at elevated levels for longer. The data point also suggests that the Federal Reserve will stay on its path of aggressive interest rate hikes, creating an unfavourable environment for cryptos and other risk assets.

"There is extreme fear across the crypto market," said Mr Marcus Sotiriou, an analyst at British-based digital-asset broker GlobalBlock.

The area around US$30,000 had been an "especially sensitive zone" for Bitcoin, wrote Mr James Malcolm, head of foreign exchange and crypto research at UBS.

That is where mining economics turn negative, "which could potentially lead to increased coin sales by this key cohort", he said. 

"Below this, there is little technical support until the low-20ks, where margin calls kick in," he added

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Meanwhile, Coinbase Global shares and bonds fell to new lows on Wednesday, signalling investor scepticism about the prospects of the crypto exchange in a bear market. The company reported lower-than-expected revenues, and warned that trading volume and monthly transacting users in the second quarter are expected to be lower than in the first.

Piper Sandler's Mr Johnson says this is another concern for crypto investors right now.

"It is the largest exchange here in the United States and it just turned a loss," he said, adding that Terra's troubles are all "snowballing in crypto land".

Still, a lot of crypto investors, cognisant of the fact that Bitcoin has gone through a boom-and-bust cycle before only to recoup losses over and over again, are preaching patience.

"Ultimately, every investor needs to size positions based on... risk level and time horizon," said Mr Alex Tapscott, managing director of the digital asset group at Ninepoint Partners. "We believe Bitcoin will recover and that we are still in the early stages of this new Internet of value. Keep calm and HODL (hold on for dear life)."

• With additional information from The Straits Times

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