Major crypto token dropped 99% in 24 hours. Here's what you should do

Amid the bloodbath in the crypto market, one crypto project has nosedived the most, wiping out about 99 per cent of its value in just 24 hours.

Interestingly, this time it's not a tiny token or a one time wonder, but a constituent among the top-10 crypto tokens, if we exclude the dollar-pegged stablecoins. Here, we are talking about Terra (LUNA).

The native token of Terra blockchain named 'LUNA' tumbled to $24.14 from $61.99, registering a massive drop of 60 per cent within a day. The token is trading about 80 per cent below its peak close to $118, scaled last month.

Terra is a blockchain protocol that uses fiat-pegged stablecoins to power price-stable global payments systems. It combines the price stability and wide adoption of fiat currencies with Bitcoin and offers fast and affordable settlements.

Its stablecoin, TerraUSD (UST), lost its dollar peg for the second time in three days, falling to as low as $0.65. As UST 'depegged' price of LUNA, its sister token, has taken a big hit.

Ganesh Kompella, Venture Partner, Tykhe Block Ventures, said the rise of LUNA and UST has been phenomenal, and it had a treasury reserve consisting of Bitcoin, which does seem a little dicey. It's only a matter of time before it fails, he added.

"With the peg breaking, we lost a peak of $6 billion of perceived value in stables from the peg breaking, showing massive uncertainty in LUNA's approach. Ideally, market makers would step in and correct the peg," he added.

The fall was so steep that the market cap of Terra dropped below the market cap of its stable coin UST, according to the data from Coinmarketcap. Even it dropped down to the 14th spot among the largest crypto tokens from the eighth spot.

Bitcoin is connected to the rest of the financial market.

Crypto evangelists have long hoped that the independent nature of crypto would make it resistant to inflation and crises. Bitcoin, the number one cryptocurrency, has no central issuer or authority controlling it. That independence from government, many argued, should ensure that Bitcoin would hold its value through economic dips, international wars or drastic policy changes.

But the last couple of years have proven this is false. When the coronavirus pandemic crushed global markets in March 2020, so too fell Bitcoin, falling by 57%. Stock markets and cryptocurrencies then both recovered and rose at a staggering rate, which analysts believe was caused by a combination of free time, disposable income, and pandemic-relief money pumped into the world by governments.

But lately, investors have been wary that change is in the air, as inflation led the Federal Reserve and other central banks to raise interest rates. For investors looking for a safe port, Bitcoin, which swings wildly by nature, may seem too risky.

Bitcoin’s fall comes on the heels of the Dow and Nasdaq’s worst single-day declines since 2020, as well as the S&P 500 hitting its nadir in the past year. The market has been unsettled by Russia’s invasion of Ukraine, which has exacerbated inflation, supply chain issues and oil prices. Slowed growth in China amidst COVID-19 outbreaks there are also contributing to financial anxieties. Some crypto evangelists predict that Bitcoin’s price will decouple from the stock market down the road—but for now, the two are very much intertwined.

Crypto is inherently volatile.

Even the biggest crypto boosters will tell you that success in the crypto world is far from guaranteed. Its volatility is part of its very appeal to many speculators: that they could make money at rates far faster than that of normal stock brokers.

But with the promise of the boom also comes that of the bust. Since Bitcoin’s inception in 2009, there have been several major bear- and bull- cycles, with short-term investors alternately flooding the market and then losing interest. Many exchanges, especially during high times, offer inherently risky propositions, allowing traders to invest with borrowed crypto. If prices start to drop, whether due to big investors selling off their shares or other reasons, a lack of actual cash flow can contribute to even faster free-falls.

Worries about regulation and security breaches

Given that crypto derives some of its value from people’s belief in it, markets can be rattled by surrounding skepticism or policy changes. China’s crackdown on bitcoin mining in mid-2021, for example, led to Bitcoin crashing from $65,000 in April to $35,000 in June. The total market capitalization of crypto similarly fell around that time when Elon Musk announced Tesla would no longer accept bitcoin for payments in May 2021, citing environmental reasons.

Many crypto investors have watched anxiously as governments of countries central to crypto trading or mining—including the U.S., China, India and Germany—have moved toward regulation. Meanwhile, crypto has been shaken by a wave of hacks and security breaches, including a $600 million hack of the Ethereum sidechain Ronin. These hacks have shaken consumer confidence in crypto and slowed growth from new potential buyers entering the field.

The number of real-world use cases that would bring newcomers into the crypto space seems to be slowing this year, Edward Moya, senior market analyst at Oanda, told CBS News. “There’s a belief that mainstream adoption [of Bitcoin] is taking a lot longer than people expected,” Moya said. “Right now, what we’re seeing is that the crypto market is in a wait-and-see mode.”

UST

Some experts also believe that the recent struggles of UST, TerraUSD, one of the largest stablecoins, played a role in the most recent Bitcoin crash. TerraUSD, also known as UST, is a token that is designed to always be worth $1, but sank below 70 cents on Monday as holders panicked and sold off their tokens en masse in a pseudo-bank-run.

In order to defend UST’s price, the Luna Foundation Guard, which safeguards the stablecoin, drained its $1.3 billion bitcoin reserve and bought $850 million more in Bitcoin. “That [action could] add meaningful sell pressure on bitcoin and could drag down markets with it,” Corey Miller, growth lead at dYdX, told TechCrunch. Caleb Franzen, a senior market analyst at Cubic Analytics, explained in the same article that “historically negative performance” and “historically negative sentiment” can lead to “continued selloff,” which impacts prices negatively.

Big picture

Whether the crypto slide continues remains to be seen. Some believe that things will only get worse as more and more investors panic. But after the price of Bitcoin dropped below $30,000, its price corrected when evangelists “bought the dip,” or entered the market at a discounted rate. They believe that amidst its day-to-day turbulence, Bitcoin will continue its zoomed-out growth pattern that it has displayed over the last decade.