A New Kind of Bank Run Reveals A $60 Billion Crypto Collapse

Terra’s coins were meant to be the future money. They relied on their confidence, which can disappear in an instant.

This month, TerraUSD and Luna crashed. TerraUSD was a stablecoin. It was supposed to have a constant $1 value. It dropped below $1, kept falling, and Luna tokens that were once more than $100 fell to less than a penny. This wiped out a combined market worth of $60 billion. Iyamuosa claims that his coins now have a value of only 3C/. He says, “I didn’t know what to do – I felt like just dying.” Iyamuosa said he decided against suicide because it would have devastating effects on his mother.

For the past two years soaring prices for Bitcoin, Dogecoin, and other cryptocurrencies have been stoking a powerful fear of ads for crypto exchanges.

Social media is flooded with stories about investors who claim they have lost their life savings to Luna. The Reddit forum dedicated to tokens has a list of suicide hotlines. The collapse of the two coins led to a digital asset rout that saw more than $300 billion disappear from all cryptocurrencies’ combined value in the week ending May 13. Bitcoin was trading at half the price it was in October. The entire crypto-edifice appears less solid at the moment.

Why cryptocurrencies crashed – what happens next

Luna and TerraUSD’s backers used to talk as if finance had been reinvented a long time ago. Do Kwon (a South Korean 30-year-old who studied computer science at Stanford) said that he was not making another type of digital cash. He was creating a new financial system which would be cheaper, faster, and pay higher interest rates to savers. Kwon stated that creating a decentralized money source on which to build an entirely new type of permissionless financial system is the holy grail in cryptocurrency.

Complexity was the system that revolved around coins. The stablecoin is the best place to start. As a substitute for cash, these coins are an integral part of the crypto community. Because they have a constant value, it’s easier to use them to pay for real-world items. (Bitcoin, and other coins similar to it, jump in price so that the seller might end up with a Honda’s value of tokens by the time the deal is done. Kwon envisaged Terra stablecoins as being used to make instant payments and transfer money around the world, which would be cheaper than Visa, Mastercard and Western Union.

This idea wasn’t novel. TerraUSD was not backed by dollars, or assets in a bank account like other stablecoins. It was meant to be worth $1 because it could be exchanged for Luna, Kwon’s token. You could redeem 1 TerraUSD stablecoin worth $10 for 1/10th Luna. This TerraUSD stablecoin could then be used to buy Luna on an exchange for $1. You’d get 10 Lunas if Luna were worth 10C/

Because Luna’s holders were able to accrue usage fees, Luna was expected to rise in value. It was basically a mullet network. In the front, there was a boring stablecoin that looked businesslike, while in the back, there is the Luna party-get-rich-quick.

Market rout causes trading to halt in collapsing cryptocurrency networks

TerraUSD was launched in 2020. However, it did not gain much traction until March 2021, when Kwon introduced Anchor, a quasi bank for crypto, where users could deposit Terra stablecoins to earn 20% interest. Kwon claims that his company, Terraform Labs in Singapore, developed the software. However, all three legs of this system are controlled by the users.

This raises an eyebrow. Some in the crypto community even claimed it was not sustainable. The 20% figure is more than Bernie Madoff’s hedge fund returns. Kwon argued that it was a safer alternative to Wells Fargo & Co. and suggested that other fintech companies, such as Venmo, might also deposit user funds there. Kwon stated that the system does not require central intervention. It’s just a beautiful combination of a number of game-theoretic incentives.

Luna’s value increased 100-fold in 2021 and TerraUSD stablecoins worth nearly $10 billion were created. Kwon, who was the avatar of an Iron Man-ish armoured hero and claimed Terra was unstoppable, tweeted that he trolled anyone who challenged his views. Kwon’s March tweet stated that Luna was bought by the community, and therefore they aren’t as poor as you broke ass. Some fans took the name Lunatics. “I am officially a Lunatic!” After tattooing the word “Luna”, next to a wolf howling at a moon, Mike Novogratz, founder of Galaxy Digital, tweeted his message in January. In a letter, the billionaire stated that his tattoo would serve as a reminder that venture investing requires humility. According to company filings, Galaxy’s realized profits last year were $1 billion due to the sale of Luna tokens.

TerraUSD was not perfect. It had the same flaws as money-market funds and banks prior to deposit insurance. Users could lose confidence in the system and rush to redeem or sell their coins. Others might do the same, afraid they won’t get $1 per token back if it takes too long. The network could issue more Luna tokens to anyone who wants them. This was also a risk. Tokens would be more expensive if more were issued. This would cause Luna to drop further, which would then mean that the network would need to issue more tokens, further aggravating the decline. This is what Wall Street calls a “death spiral.”

Steven McClurg is chief investment officer at Brentwood-based Valkyrie Investments. “You can’t just make more money from thin air.”

May 7th was the date of the crisis. As part of a general slump, Luna was already falling. The price of TerraUSD dropped to 99C/ after a trader swapped TerraUSD for other stablecoins. This led to speculation that the dollar peg might be at risk. Kwon had accumulated a few billion dollars worth of Bitcoin to support TerraUSD in an emergency. He also tweeted his confidence in its stability. Kwon wrote May 8: “Those who are waiting for the earth’s instability–I fear you will be waiting till the age of man expires.” Luna issued more tokens the following day as Terra continued to redeem.

Luna lost more than half of its value to $30. Then, it lost two-thirds of its value the next day. Kwon exhorted his followers to keep going. He tweeted, “Getting closer… stay strong lunatics.” The death spiral was unstoppable. The price of TerraUSD had fallen to $0.00001834 by the morning of May 13. TerraUSD’s value dropped to below 20C/ because, even though it could be exchanged for a huge pile of Luna tokens hypothetically worth $1 each, no one was willing to buy them.

The Nigerian investor Iyamuosa claims that he has spent the days following the crash in disbelief. He’s down to $20 and still uses Twitter and Discord to search for crypto projects that will bring him back his money. It seems impossible for him to realize his dream of studying in Canada. He says, “There’s literally no other option for me again.” “I don’t know, man. “Honestly, there is no job. There’s nothing.”

Others investors claim they were also prepared for downs and ups but never expected such a sudden collapse. Senior Bernier, a Montreal-based flooring contractor, estimates that he lost approximately $250,000. He says that Do Kwon, a Montreal-based flooring contractor, has lost about $250,000.

One investor stated that it felt like he was witnessing his own house being destroyed or something. This was in an audio support group via Twitter Spaces. The host stated, “You are not an idiot, and you’re still loved.” Please don’t make rash decisions, guys.

Kwon did not respond to messages seeking comment. He tweeted on May 13: “I am heartbroken at the pain my invention caused on all of you.” He stated that he had a plan to revive his financial system but without a stablecoin.

The crypto market seems to have stabilized. Tether, the most widely used stablecoin, fell below $1 after recovering. However, the fall of Terra has prompted calls for regulations for stablecoins in the US and UK. According to reports, authorities in South Korea have reactivated a financial fraud investigation unit to investigate the Terra collapse. If crypto and the complex DeFi ecosystem keep growing, regulators fear a collapse such as this could cause financial system disruptions. Rohit Chopra (director of the US Consumer Financial Protection Bureau), said that many people believed that a stablecoin would be just as good as a US dollar in a Bloomberg Television interview. They’re finding out that it is not.


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