Stablecoin TerraUSD breaks Dollar peg

10 May 2022

The world’s fourth largest stablecoin, TerraUSD lost a third of its value on Tuesday, in part leading to Bitcoin’s decline under $30,000 for the first time in 10 months.

Stablecoins – pegged to the value of traditional assets like USD – are seen as safe havens during crypto volatility. TerraUSD broke its 1:1 peg to the Dollar on Tuesday to fall to $0.67, according to data from CoinGecko.

The digital token shot to fame earlier in the year when Luna Foundation Guard pledged to accumulate $10 billion worth of Bitcoin to bolster its Dollar peg.

Terra USD holds its peg via an algorithm that moderates supply and demand within a process using another balancing token, Luna, Reuters reports.

Luna Foundation Guard said earlier this week it would support TerraUSD's Dollar peg through $1.5 billion in loans to trading companies, half in Bitcoin and half in TerraUSD.

Justin d'Anethan institutional sales director at Amber Group said using Bitcoin as a reserve had led to a vicious cycle for TerraUSD as selloffs in both tokens are driving the other down.

“Bitcoin is going down as it's being sold to defend an ecosystem that is suffering, the ecosystem suffering is creating even more panic on (TerraUSD), which is weighing on the Luna token, which requires the foundation to use more reserves to supplement and defend the peg,” he stated.

“It's not a fun situation to be in.”

Bitcoin declined under $30,000 for the first time since July 2021 on Tuesday, along with other "risk off" assets such as tech stocks, but was also impacted by the TerraUSD selloff.

According to Singapore's QCP Capital analysts, although Bitcoin was holding at a key support level, "there is material tail risk from the (TerraUSD) de-peg along with macro concerns."