Will LUNA recover from its recent massive price crash? Read more to find out.
So far, May 2022 has not been a great month for the cryptocurrency market as it has been facing an unprecedented crash the past week. At the time of writing, Bitcoin's (BTC) price stands at $29,902. However, one of the biggest cryptos negatively impacted appears to be Terra Luna (LUNA), which crashed over 99% on May 13, as per CoinMarketCap data. And the reason behind this is the ‘de-pegging’ of TerraUSD (UST) stablecoin.
Looking at the current state of LUNA, priced at $0.0001822, it is hard to believe that the coin was valued at more than US$100 recently. LUNA investors were wiped out of over 95% of their wealth in just a handful of days. LUNA's price is now more than 90% below its all-time peak of US$118, as seen in April.
LUNA Crash: Why Is Terra Luna Crashing?
What happened to Terra (LUNA), which some traders that rushed to buy LUNA crypto coins did not know, was inflation of the circulating supply.
The severe inflation prompted the Terraform Labs team to halt the Terra blockchain, but the damage had been done. Hyperinflation caused the LUNA supply of coins in circulation to hyperinflate from around 350 million to 6.5 trillion, an over 18,000 times increase.
By the law of supply and demand, if there is 18570x more of something, it becomes as much less valuable per unit. It is no longer as rare or scarce. Notably, crypto has been referred to as digital gold by many experts, including the Winklevoss twins, billionaire founders of Gemini Exchange.
In addition, investors panic selling their LUNA holdings, and liquidations resulted in LUNA dropping over 99% from its all-time high of $119 to under a dollar, then 99% again to one cent, then 99% twice more to its current 2022 low. It did not help that Bitcoin dropped under $27,000, and the S&P 500 under 4,000 on the same day, for the first time in over a year.
Considered one of the most regulated, safest crypto platforms for beginners, eToro.com suspended LUNA trading at just under one cent – saving those who wanted to buy LUNA crypto tokens from two of those 99% drops. However, the question right now is - will Terra Luna come back?
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
LUNA Crash And Recovery: UST And LUNA
The Terra ecosystem adopted UST as a stablecoin, leading to the interlinking of LUNA and UST. A stablecoin is linked to an underlying asset, such as a precious metal like gold or the US dollar. UST recently de-pegged to $0.45 from its value of $1, marking a drop of about 55%. Since both UST and LUNA are interlinked, the massive fall in UST value has resulted in LUNA’s overall crash.
So will LUNA come back and recover its previous highs? Learning more about the LUNA tokenomics will help us understand the possible LUNA recovery process.
Read Also: Terra (LUNA) Price Prediction
Terra LUNA Recovery: Fundamentals
What happened to LUNA was different from other crypto crashes because of what the LUNA crypto asset is. The protocol enables stablecoins created for decentralized finance (DeFi) applications.
Anyone could use it as a payments network without the need for a central bank, any banking institution, or a centralized entity like Visa – people could be their own payment processor. In the words of Goldman Sachs, DeFi is ‘easier to access for underbanked populations and provides faster settlements for users.’
How Can LUNA Come Back?
One way for LUNA to recover to anywhere close to its former high of over $100 would be to burn large amounts of the LUNA circulating supply from the 6.5 trillion back to somewhere near the 350 million it was before the crash. However, that is no easy feat.
Another big question is will the broader crypto market recover? Bitcoin is holding stable at around $30,000 but has yet to break out to the upside. Based on past market-wide crashes and recoveries, it is safe to assume that the market will recover, but probably not very soon.
After first proposing a Luna recovery plan that prioritized absorbing the UST supply, the co-creator of Terra, Do Kwon, has now offered an alternative idea that would restart the Terra Luna ecosystem and focus on saving the Layer-1 instead.
In an attempt to promote LUNA’s recovery and compensate token holders, Do Kwon put forward a collaborative plan of action with the Terra community. His post on the Terra Agora forum released a specific short-term timeline for this recovery plan.
Within this action, Terraform Labs planned to hold a governance vote on Wednesday, May 18, on whether to pass a hard fork for Terra, similar to the famous DAO hack the Ethereum network experienced in 2016, which split blockchain networks into two tokens, Ethereum (ETH) and Ethereum Classic (ETC).
In this case, the current worthless LUNA tokens will get converted to Luna Classic (LUNC) once the fork occurs. Holders, stakers, and developers of LUNC will be rewarded with brand new LUNA tokens that will be capped at 1 billion. If everything goes according to the CEO's plan, the new LUNA network will be launched on May 27th.
The Terraform Labs CEO explained that the Terra ecosystem, its developers, token holders, and strong brand name will be preserved by implementing this plan. Of course, this remains just a proposal, and without a consensus among the Terra community, it might not happen.
The alternative path towards a Luna recovery proposed by some Luna holders involves a Luna burn. By destroying much of the circulating supply, they hope will help LUNA recover its price and come back to its previous position in the near future.
eToro – The Best Platform To Buy Terra
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
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