‘Evil genius’ may have caused Terra and Luna cryptocurrencies to crash in a ‘death spiral’

It’s been a stressful week for those who own bitcoin and other cryptocurrencies, as they watched billions of dollars get wiped off the value of their assets.

Bitcoin (which has often been touted as “digital gold” or a “hedge against inflation”) plunged below $US25,500 this week — a far cry from the record high $US69,000 price tag it commanded back in November.

The wider crypto market (which includes thousands of digital currencies and tokens) has seen its value plunge by more than 50 per cent since then.

Lately, people have been dumping their riskier, speculative assets like crypto, tech stocks, and shares in companies which are still in their “growth” phase (and not paying dividends).

It comes as the US Federal Reserve (and central banks globally) hike interest rates aggressively — and remove trillions of dollars worth of COVID-19 stimulus, in a desperate bid to keep a lid on decades-high inflation.

Crypto bank run

Apart from those “big picture” economic factors, analysts say the crash of the TerraUSD “stablecoin” (or UST) — and its potential contagion effect — was the main reason behind this week’s cryptocurrency sell-off.

Stablecoins like UST, Tether and USDC are like bank accounts for the crypto ecosystem, and their value is usually pegged to fiat currencies like the US dollar (on 1:1 basis).

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Crash of stablecoin Luna could be the work of an ‘evil genius’(Elysse Morgan)

In theory, they’re meant to have a fixed value (around $US1) so they can be a reliable store of value — in contrast to the extreme volatility of bitcoin, ethereum and others.

Terra was one of the world’s most valuable (and stable) digital currencies. But on Tuesday, a huge sell-off occurred as the value of the Terra stablecoin suddenly “unpegged” from the US dollar.

Its value plunged from $US1 (where it was always meant to remain) to 60 US cents. Then it crashed again on Wednesday, bringing its value down to 20 US cents.

It was the equivalent of a crypto “bank run”, as people rushed to pull their money out.

Where did it go wrong?

Most stablecoins are backed by cash reserves, and they’re supposed to have enough liquid assets on hand to match the value of each coin.

However, Terra (UST) is an “algorithmic” stablecoin — whose value is backed by a “sister” token called Luna, which is run on pre-programmed “smart contracts”.

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