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The Terra (LUNA) debacle – A summary of the massive price declines

 


What is Terra (LUNA)?

Terra is a blockchain network, which is characterized by the fact that it can use algorithms to stabilize the value of stablecoins. As a result, completely decentralized stablecoins can be created that do not require any reserves in the form of FIAT currencies for stabilization. The LUNA token is responsible for the price stability of the Terra stablecoins.

Terra thus combines the price stability of stablecoins with the decentralization of cryptocurrencies. So far, stablecoins have always been based on central structures. Terra uses the proof-of-stake consensus mechanism, which allows for fast and efficient transactions. Especially in the DeFi area, Terra was extremely successful and is becoming the second most important blockchain behind Ethereum.

The course of the LUNA token experienced a massive upswing in the first quarter of 2022. After the price had already risen to almost 100 US dollars by the end of 2021 , another massive rise in the price to an all-time high of over 116 dollars in early April followed, especially in February and March.

What is remarkable about the development of the LUNA token is that almost all other cryptocurrencies suffered heavy losses in these months. The losses started as early as December, when LUNA experienced its first peak. Then in the first quarter of 2022, Terra (LUNA) surged while the prices of many other coins continued to decline.


What happened to the LUNA token?

Almost overnight, the LUNA token from Terra suddenly lost a lot of value in the last few days and basically became worthless. From above $86, the LUNA token fell to a price of $0.0021. The crash coincided with the massive drop in price of the stablecoin TerraUSD, which lost its peg to the dollar. The TerraUSD is currently only at $0.088.

Due to the connection between the two tokens, we saw simultaneous massive crashes of both the cryptocurrency LUNA and the stablecoin TerraUSD. Because the latter is only kept stable in the Terra ecosystem by the LUNA token. The LUNA thus completely imploded within a few days.


What were the reasons for the crash of Terra (LUNA)?

The big trigger for the massive drop in value of the LUNA token was the failure to link the stablecoin TerraUSD to the US dollar. The algorithms in the Terra Network should actually ensure that this stable coin is linked to the value of the US dollar. 


But in the past few days, Terra has failed to meet this minimum requirement for a stablecoin. TerraUSD tumbled down to $0.16 in value. This massive loss is unheard of for a stablecoin. What followed was a massive chain reaction that led to sales of the LUNA token. The value of the LUNA token plummeted. 


The crash and decoupling of the TerraUSD from the dollar triggered an avalanche of further selling. Trust in the LUNA token has been completely broken and the Terra project is even like a fraudulent Ponzi scheme.

What are the consequences of the crash?

Due to the massive price losses of LUNA and the fact that the token is now basically worthless, the crypto exchanges were forced to remove Terra (LUNA) from their exchanges. LUNA halted trading completely due to the avalanche of sales. However, trading has now resumed on many exchanges. Lots of short-term traders keep Terra (LUNA) trading volume very high. 


The founder of Terra Do Kwon has set himself the goal of reviving the project in the short term after the implosion of Terra (LUNA). Despite attempts to revive Terra, the pre-crash status quo cannot be restored, even according to Do Kwon. Terra will no longer function as it did before the crash.

The Terra (LUNA) crash also had an impact on the overall market and caused Bitcoin and other cryptocurrencies to suffer losses again in the past few days. After all, before the crash, LUNA was one of the 10 most valuable coins by market capitalization. 


Can Terra (LUNA) come back?

Project Terra was extremely promising. However, it also showed how volatile and risky cryptocurrencies can be. Many investors lost a lot of money with the crash. This also irrevocably broke trust in the LUNA Coin.


There can be no return for Terra (LUNA). The LUNA token can still be traded. However, the decentralized stablecoins project at Terra initially failed with the decoupling of the TerraUSD from the dollar and the implosion of LUNA. 


Should you buy the LUNA token now?

Many investors who have not previously owned LUNA are now wondering whether it is worth buying Terra's LUNA token now at these extremely low prices and making profits in the future. This is a valid goal and in fact, with the price so low, LUNA's price seems only going to go up in the future.


Ultimately, however, the investment in the LUNA token is probably just pure speculation. As an investor, you can now bet on the LUNA token. However, investor confidence has been completely destroyed. Under no circumstances should you consider the LUNA token as a long-term investment. 


What can we learn from the crash?

The Terra (LUNA) crash shows that the crypto market can still be very risky in 2022. Relatively new projects that are currently hyped can also quickly implode again. Therefore, caution is always required, especially with young projects.

Furthermore, it is still important to diversify and only invest the money in the market that you are willing to lose again. Cryptocurrencies can bring massive profits in a short time, but also have the risk of losing value massively within a very short time.

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