Terra Luna’s shock crash shines spotlight on cracks within crypto industry

Highlights

• Terra Luna token has nosedived from a high of US$118 in April to just six US cents, where it currently sits
• It’s been a horrendous week for the crypto market with the vast majority of digital currencies suffering heavy losses
• While Bitcoin, Solana and Cardano have shed over 10% in the past seven days,

Terra Luna token has plummeted from a high of US$118 in April to just six US cents, where it currently sits.

Terra Luna’s devastating and sudden collapse also had a knock-on effect on sister token, TerraUSD, which plunged a massive 70%.

The sudden losses in TerraUSD are particularly troubling given the whole purpose of a stablecoin is to hold its value.

It’s not known, at this time, what caused the value of the two stablecoins to plummet, but many on social media are already pointing to a possible conspiracy, speculating that there may have been collusion amongst US hedge funds.

Also Read: Why is Tether (USDT) crypto dropping from its dollar-pegged price?

However, many experts have pointed finger at the infrastructure of Terra, which uses an algorithm rather than cash and collateral to hold its value to one dollar.

Others have pointed out the underlying failure of Terra to assign a monetary value, which is ultimately not backed by any central bank. Rather, people who buy into the stablecoin are required to agree upon its value.

What Terra’s crash tells about the crypto industry

The major drop of Terra Luna and Terra USD reveal problems that have plagued the crypto industry from the very start. The lack of regulation in the crypto space was always a looming problem for Terra Luna, which, as previously mentioned, uses fiat-pegged stablecoins and is backed by an algorithm rather than any actual cash reserves.

Terra Luna’s algorithm is designed in such a way that if Terra falls below US$1, holders could swap it for Luna, ensuring its stability. But with both Terra and TerraUSD collapsing simultaneously, investors have been left reeling.

In retrospect, this was a catastrophe waiting to happen.

The crash has led many to speculate that the crypto market could be heading into a “crypto winter”, where cryptos could very well lose most of their value.

Renewed Calls for Regulation 

The latest crash of Terra has reignited calls for greater regulation in the crypto space.

While crypto regulations have been implemented in nations worldwide, with some countries like China banning it altogether; it’s concerning to many that catastrophes like Terra’s latest crash can still happen.

Also Read: What is DeFi? Can it coexist with the traditional banking system?

Moreover, crypto critics, who have called this latest crash as the “death spiral” have questioned the judgement to collaterise Terra with a volatile asset like Bitcoin. As both currencies spiralled this week, further fear led to further selling, eventually leading to a mass meltdown.

It’s unclear what the ultimate fate of both Terra Luna and Terra USD will be; needless to say, in the short term, its prospects seem to be all but over.

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