The value of billions has been wiped out in the cryptocurrency market after an epic failure and now accusations are mounting that something sinister has fallen.
People have wiped out their savings in a crypto bloodbath, and homes are under threat as $200 billion ($291 billion) has been slashed from the cryptocurrency market in just 24 hours.
The chaos in the cryptocurrency world was the result of a massive sell-off, as terrified investors raced to offload their assets – but no one knows why two of the industry’s biggest players have collapsed.
Bitcoin has fallen from a high of $69,000 to below $25,500 this week, but it wasn’t the world’s most popular cryptocurrency that caused massive shock waves across the sector.
Instead, it was the crash of Terra (UST) and its sister icon, Luna.
Terra is known as a “stable coin” – Cryptocurrencies “Tethered” Against the US dollar or other traditional assets, which in theory protect them from the bloodbaths of the market.
This means that the investor should be able to sell the token at any time and get one dollar in return.
The idea behind the arrangement is that if the terra drops below $1, it can be replaced with the Luna, which was supposed to ensure stability — but this week, both crashed simultaneously, with the Luna crashing 98 percent.
Terra, which was one of the most valuable stablecoins in the world, saw a sharp drop in its value below $0.20.
Overselling was equivalent to panicked people running into banks and withdrawing all their money.
Luna’s simultaneous crash with Terra has been described by experts as a “death spiral”, as it fell from around $86 earlier this week before dropping to $0.003 on Friday.
The primary collapse of Luna, which saw its market capitalization rise from $40 billion to around $500 million, had a major impact on the broader cryptocurrency market with Bitcoin dropping to its lowest level since December 2020 and Ethereum also dropping 16 percent.
Social media has gone into overdrive – accusing big US hedge funds and trading firms for causing the collapse due to the billions involved in trades that have fallen.
Some of the leading US investment firms, including BlackRock and Citadel Securities, were quick to deny any involvement.
However, Lisa Wade, CEO of DigitalX Blockchain, said that while it was too early to say whether the crash’s momentum was due to collusion, it appeared to be “exploitative.”
Conspiracy theorists will say “yes,” because it’s a huge business. I mean, in all my career, it’s been one of the biggest deals I’ve seen,” she said ABC.
“It’s almost like a genius wicked plot, because there are so many steps to making it happen.”
She described the plot as complex – it involved buying $1 billion worth of terra, betting that the price of Bitcoin would fall in a move called “short selling”, as well as looking into its timing when all eyes were lower on the market.
She explained that Saturday night was their target as it was when trading volumes were low.
In basic terms, it saw terra sell out at huge volumes which then triggered a wave of selling that broke the stablecoin system and also to other cryptocurrencies with the likes of bitcoin offloading as well.
“Luna was impressed because she is the main [backer] from underground tanks. So every time the floor cabinets are used [token] buy luna [token] Burnt out, which means there are fewer icons on display, so the price of Luna goes up.”
The opposite applies, she added, when people start selling and a large amount of Luna has essentially flooded the market, bringing the price down.
“If there are no buyers and the price goes down, it will start feeding on itself, because people start to panic and sell Luna,” she said.
This was a exploitative trade that took advantage of the fact that the markets are weaker. The perfect storm was for no one to step up to buy bitcoin and UST.”
The heartbreaking stories were shared on the TerraLuna Reddit page with moderators pinning a list of suicide prevention hotlines from around the world at the top of the page.
“I lost more than 450 thousand US dollars, and I cannot pay the bank. I will lose my house soon. I will be homeless,” wrote one of the people on the forum.
Another talked about losing all their savings after buying Luna for $85, while others said they lost $50,000 in one night.
“I should have cashed in when it was $100, then I would have gone up $25,000,” one user said.
“But I am greedy in the hope of getting more money so that I can at least afford a down payment on a home for my family. I think there is no home and savings after that.”
Terra and Luna’s maker, South Korean Do Kwon, described the incident as an “attack”.
“I’ve spent the past few days on the phone to contact members of the Terra community—builders, community members, employees, friends and family, who have been devastated by untangling the floor cabinets,” he tweeted Saturday.
“I am saddened by the pain my invention has caused you all.”
Ms Wade added that it was disturbing that both mother and father investors who used their savings to support stablecoins that were offering a return of 20 per cent, had fallen into disuse.
“A lot of innocent people have saved their money in the belief that they are getting a risk-free deposit,” she said.
Terra’s recovery seems unlikely, as its backers find little impetus to raise $1.5 billion to boost its value and restore it to par with the US dollar.
On Saturday, Mr. Kwon seemed to indicate that it was game over for the way the stablecoin was operating.
“I continue to believe that decentralized economies are worth decentralized money — but the US dollar in its current form is clearly not going to be that money,” he wrote on Twitter.
Neither I nor any of the organizations I belong to have benefited in any way from this incident. I didn’t sell Luna nor the floor cabinets during the crisis.”
He added that there were “multiple proposals” for the best next steps.
“What we should look forward to maintaining now is the community and developers who make the blockspace valuable – I am sure our community will form consensus on the best path forward for itself, and find a way to rise again,” he said.