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Tags Current Affairs

Luna crypto crash

Date: 17 May 2022 Tags: IT, Mobile & Computers

Issue

Luna, the sister cryptocurrency of algorithmic stable-coin Terra, has witnessed a sharp crash in its value.

 

Background

The crash has been dubbed as severe as the big financial crisis of 2008 for cryptocurrency.

 

Details

The stablecoins are considered to be safer bets within the crypto universe. Their fall has prompted regulators and authorities to call for stricter laws governing these assets.

 

Stablecoins

  • Stablecoins are tokens pegged to the value of a government-backed currency such as the US dollar or commodities like gold or silver.

  • They give some amount of security to investors as they largely trade around $1 per token due to value proposition.

 

Terra stablecoin

  • Terra is not similar to other stablecoins as it is not backed by a fiat currency or other commodities.

  • The value of Terra is not decided by financial collateral in the traditional markets but by lines of complex computer code.

  • To stabilize Terra value, the algorithm incentivizes investors to take advantage of price changes between Terra and its sister token Luna.

 

The recent crash

  • The Terra coin fell below $1 mark, which put tremendous pressure on Luna currency for selling. This resulted in the currency losing all its value as investors sold it.

  • About $40 billion from investors’ pockets has been wiped out due to Luna losing its value. This is significant since it was considered to be among the top ten tokens before the crash.

 

Impact of crash

Investors have lost all their investments in Terra and Luna cryptocurrencies. Bitcoin has also seen its value fall below $27,000.

 

Impact on cryptocurrency investment

  • There are chances that regulators may tighten rules around investment in cryptocurrencies, especially stablecoins.

  • There are calls for a consistent federal framework that will ensure stability and reduce risk for investors.

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