According to the experts, the crash in LUNA is as severe as the big financial crisis of 2008!

So-called stablecoins are sending shockwaves through the cryptocurrency markets, wiping billions off their value, causing liquid cryptos such as Bitcoin to crash and people to lose their savings. The sharp crash in LUNA, the sister cryptocurrency of algorithmic stablecoin Terra, which has rendered it almost worthless, has sent shockwaves throughout the cryptocurrency market, with experts likening the crash in the crypto market to be as severe as the big financial crisis of 2008. The near-collapse of these stablecoins, considered to be comparatively safer investment bets within the crypto universe, has also prompted regulators and authorities to call for stricter laws governing these financial assets.

Stablecoins claim to be a relative haven in the highly volatile crypto market. They are meant to be tied to a fiat currency and usually maintain a 1-to-1 peg with the US dollar. But recent events have proven that they are just as volatile as other cryptocurrencies.

It's worse for LUNA holders. The value of LUNA tokens has almost completely disappeared: After reaching a high of just under US$120 in April, LUNA's current price is a fraction of a penny.

Whether it was one giant whale or collusion between large hedge funds, someone appears to have bought up around US$1 billion worth of UST stablecoins, while shorting their Bitcoin holdings. Massive withdrawals were made from Anchor, decentralized finance (Defi) protocol based on the Terra network. Deposits dove from US$14 billion to US$11.2 billion over just one weekend. The existing negative market sentiment combined with fresh FUD fear, uncertainty, and doubt led to the perfect conditions for a bunk run. People rushed to pull their money out. As the price of the UST stablecoin dropped due to the dramatic drop in demand, so did the value of LUNA, causing UST to ultimately lose its peg. How the attack was orchestrated is being compared by many to the bet George Soros' made against the British pound in the early 1990s. One estimate puts the rug-pull at over US$800 million. As things stand, no one knows the true culprit of this attack.

The Effect on the Cryptocurrency Market

The cryptocurrency market, like other financial systems, is intricately entwined. As TerraUSD fell, the losses bled into other cryptocurrencies. Tether dropped to US$0.96 on Thursday, though it later rebounded to again match the value of the US dollar. As tether slid, bitcoin plunged to around US$25,400 on Thursday, its lowest value since December 2020, before rallying to around US$29,500 on Friday. Overall, the entire crypto market has been slashed by more than half since November, falling to US$1.2 trillion from US$2.9 trillion, according to data from CoinMarketCap. What's more, the crash could potentially affect the traditional financial system. As Bloomberg's Matt Levine points out, some traditional traders own crypto. If their crypto holdings dive, it could affect how those traders operate elsewhere.

Regulators have taken the opportunity to highlight the risks of crypto assets. Many are warning of the possible larger impact on financial markets with many bigwig companies now having Bitcoin and other crypto assets on their balance sheets. Terra's market crash also threatens to throw water on the fund-raising streak that crypto startups were counting on with venture capitalists reassessing their risk tolerance.

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