The Terra Collapse [A Thorough Analysis]
The Terra Collapse [A Thorough Analysis]
Crypto

The Terra Collapse [A Thorough Analysis]

By Guest post - 3 Dec 2022

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Terra LUNA was once considered one of the top 10 largest cryptos in the world, but its value sank to almost nothing in a short amount of time, and now, its forked project, LUNA 2.0, is also facing a questionable future.

Learn more about the fall of one of the largest cryptocurrencies down below:

Terra Collapse

The Story of Terra LUNA

The story of Terra LUNA is a reminder that cryptocurrency remains extremely risky and is considered a high-risk asset. When investing in crypto, positions should be approached with proper analysis, understanding of the project, and backing just in case things go wrong.

Unlike most investors, however, many people who lost money in crypto didn’t have a lot of money to spare. There were even reports of suicide from a man that lost around $2 million USD due to the crash of LUNA.

The story is a reminder to not place all your eggs in one basket and always do your research before investing in anything that is high risk. However, investors with well-balanced portfolios can survive a potential crash on one position since it does not make up their whole portfolio.

When investing in crypto, it is also recommended to spread it out between different projects you believe in to minimise risk and not just one single project. This would help you protect your investment from completely collapsing in case a crash or something bad happens to the project.

In the case of Terra LUNA’s crash, the investors that were able to survive were those that did not place all their savings in LUNA or had other investments in other assets to mitigate the loss. However, investors who placed all their savings in LUNA lost the most during the crash of crypto, which was once part of the top 10 cryptocurrencies in the market.

Why Did Terra LUNA Crash?

While there are a lot of speculations as to what happened to LUNA, the facts still give a lot of supporting evidence as to why it was bound to crash in the first place. LUNA is a coin that exists on the Terra blockchain and is being overseen by Luna Foundation Guard (LFG), a non-profit.

The company was reportedly able to amass $3.5 billion worth of Bitcoin before the crash. LUNA’s Bitcoin holdings also played a huge part in why it collapsed in the first place.

In order to understand LUNA, you have to understand its dollar-backed stable coin called UST. Although still a conspiracy theory, the results are definitely real. The story says that someone dumped $350 million worth of UST, which led to the price of the stable coin tanking significantly.

UST is an algorithmic stable coin, and unlike other stablecoins, it is not backed up by a dollar but rather backed up by LUNA. This means that in order to mint one UST, you’ll have to burn $1 worth of LUNA in return.

Since the price of UST crashed, LUNA had to dump its Bitcoin holdings to save the project. This resulted in the price of BTC dropping, which could make a huge amount of profit for those with a short position.

Due to the price of UST falling, new LUNA had to be minted in order for it to be burned so new UST could be created. This created a chain effect from UST’s price falling down to LUNA’s price falling down as well.

The situation worsened as fear entered the market, and investors started unloading their positions in fear that things could worsen. With more LUNA in circulation and investors exiting their holdings, the price of LUNA officially crashed.

Was UST Anchor a Legitimate Project?

UST has not always been recognised as a safe, stable coin due to another project called Anchor. The Anchor project promised a 20% annual return on the UST invested in its platform. This meant that if you placed $100 of UST in Anchor, you would have a return of $120 a year later.

Some crypto enthusiasts dubbed this as a Ponzi scheme since Anchor didn’t really have enough means to generate a profit this big. This means Anchor would have to do better than Coca Cola, one of the largest companies in the world, which only raked in 16% in Return on Capital Employed.

The theory also says that the only way Anchor was capable of paying investors was from the money coming in from new investors. By definition, this is how a Ponzi scheme works, according to enthusiasts.

When looking for crypto investment, to avoid falling victim to projects like LUNA, it is recommended to choose blue-chip cryptos that were picked and vetted via brokers. You can visit Immediate Edge or BitiCodes in order to get connected to brokers, they do not let their traders fall victim to projects like LUNA and only list cryptocurrencies with strong economics.

Terra Collapse

What did LUNA Do Next?

In an effort to try to save the project, LUNA decided to do a hard fork which means they split the cryptocurrency into two different entities, LUNA Classic and LUNA 2.0. Just like Ethereum and Ethereum Classic, Luna Classic retained the cryptocurrency’s code while LUNA 2.0 supposedly included an updated version of the crypto.

LUNA 2.0, however, sank by around 80% just a few moments after it launched. As of the moment, it’s hard to tell whether the original investors, which lost a lot of money on the original LUNA, still believed in the project.

LUNA tried to keep investors on board by promising them that they would receive an airdrop of LUNA 2.0 as long as they held their crypto. This, however, wasn’t enough to keep investors and LUNA holders from losing faith in the project.

Is There Any Hope for LUNA?

Although other cryptocurrencies like Bitcoin have dropped significantly in price but have managed to recover, LUNA might be a special case, and there’s really no knowledge as to whether or not it will become profitable again someday with LUNA 2.0.

As of the moment, most moves being made around LUNA remain highly speculative and extremely risky. While the project used to be one of the top 10 cryptocurrencies, it now holds a very questionable position as to whether it should be trusted again or not.

Unlike other stablecoins, USDT was not pegged directly to the dollar, which meant that the company likely did not have the dollar equivalent to back it up in the event of a crash. The story of LUNA is a reminder to make sure you understand the cryptocurrency before investing in it.

Conclusion

The story of LUNA reminds traders and investors of the importance of being financially responsible with whatever holdings you may have. Although some people are lucky when they invest all their money into one project that kicks off and brings them the most profit, luck might not be on everyone’s side, especially with the crypto market going through extreme turbulence.

Before investing in any cryptocurrency, it is important to understand how it works and consult your financial advisor to make sure you are not putting yourself in a position of extreme risk should a crash happen.

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