As the Terra stablecoin becomes depegged from the U.S. dollar, the biggest buyer of bitcoin in recent months could become its biggest forced seller.
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UST Dollar Peg Collapses
The depegging of the Terra stablecoin (UST) from the US dollar began over the weekend and has intensified today, with Terra currently trading at $0.85. As the situation worsens, many of these market dynamics have been playing out in near real time today, and will very certainly change again over the next 24 hours. Over the weekend, billions of dollars in UST left the high-yielding Anchor Protocol, triggering a full-fledged digital bank run.
UST uses algorithmic minting and burning mechanics to keep the LUNA token’s price stable. When UST is off its $1 peg, this strategy creates an arbitrage opportunity. Traders can earn by burning LUNA and creating new UST when UST is priced over $1. When UST falls below $1, it is burned and LUNA is created to assist keep the peg stable. However, as a result of the loss of demand and liquidity in UST, LUNA has dropped about 26% in a single day, while BTC has dropped nearly 8%.
Why does this matter for bitcoin? Because the centralized Luna Foundation Guard (LFG) has amassed 42,530 bitcoin ($1.275 billion at a $30,000 price) as reserves to preserve the UST peg if it continues to fall below $1. And that is precisely what they are attempting right now.
As a result, the LFG voted earlier today to lend $750 million worth of bitcoin and $750 million worth of UST to OTC trading firms in an effort to keep the UST peg afloat. Later in the day, the LFG announced a withdrawal of over 37,000 BTC to lend to market makers, underlining that it is now being utilized to purchase UST.
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The market’s major concern currently is that the largest buyer of bitcoin in recent months will now become the market’s largest forced seller. Market expectations and possible selling have undoubtedly contributed to bitcoin’s unprecedented selloff today, but it comes at the same time that global equities markets have been falling in lockstep. Since November 2021, Bitcoin’s correlation to larger equity indices and tech equities has been at historic highs, following the same market dynamics.
We’ve been highlighting these dynamics and the wider market concerns at hand for months as a result of rising global interest rates, 40-year high inflation, declining growth, and a macro credit sell-off and unwinding developing.