Considered a saviour of the crypto market back in March with a billion-worth buying spree of Bitcoin, the Terra Foundation has released a statement revealing that it contributed to the price drop below $34,000.
Following considerabe outflows from TerraUSD (UST) on Anchor, holders of the stablecoin witnessed a brief de-pegging where the stablecoin dropped below $1. In order to avoid further downside and a potentially catastrophic systemic risk event, the Luna foundation (LFG) sold some Bitcoin holdings (at around a 1/3 loss), adding more fuel to the fire.
In a tweet, the foundation attributed the downside risk to “market turmoil” which is also reflected “across legacy asset classes”.
1/ Over the past several days, market volatility across crypto assets has been significant.
The market turmoil is also reflected by the past week’s uncertain macro conditions across legacy asset classes.
— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022
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Do Kwon, the founder and “Master” of the Luna stablecoin explained the foundations actions in another thread, underlining the drawbacks the foundation faced.
We had hoped that the onchain bitcoin reserve system would be live by the time the Terra economy would contract, thereby obviating the need for LFG discretionary intervention. While this did not happen, allowing BTC to be redeemed against US on an onchain dex, we are just a few weeks away from a testnet launch developed by the @astroport_fi team. Until then, the LFG council decided to err on the side of caution.
He added that the foundation will likely deploy reserves over the next few days.
Asked about details on the foundation’s risky reserve strategy by a veteran bitcoin trader as to whether LFG considered backstopping UST using a basket of established stablecoins, Kwon said that strategy “would not be long term decentralised. Regurgitated fiat coins are not interesting”.
In doing so, however, the foundation has potentially opened itself up to a higher-probability systemic risk event relative to its peers such as USD Tether or USDC. Since Bitcoin does not only go up, using the Nakamoto standard cryptocurrency as collateral instead of US Dollar derivatives could add another layer of risk which grows as BTC prices slide and risk-off sentiment dominates all markets.
Crypto markets are currently in a state of panic, with the entire market losing $200 billion in market capitalisation in a couple of days. After six weeks of selling, the market has set a new record for the most consecutive weeks unrelenting downside. The last time selling was this relentless was in 2014. Curiously, the onslaught has not stopped value buyers from stepping in to purchase bitcoin on sale and to remove coins off exchanges.
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