Recently, many new fans who have entered the currency circle have heard of #LUNA to some extent, but they may not necessarily understand the story behind it. Today we will review this token that once made many investors cry. The LUNA coin was once known as "Moutai in the currency circle". Its price reached $119.5 in April 2022. However, after May 12, it experienced a terrifying cliff-like collapse, causing massacre in the currency circle.
The Rise and Glory of LUNA Coin
LUNA coin was designed by the Terra team as the token of the Terra platform with the purpose of absorbing the volatility of UST. UST is a so-called algorithmic stablecoin that is forcibly pegged to the U.S. dollar at a 1:1 ratio. The Terra team has designed a mechanism to convert one dollar worth of LUNA coins into 1UST. For every 1 UST minted, 1 USD worth of LUNA must be destroyed, and vice versa. Through this mechanism, the price of UST is stabilized at around $1.
The price of LUNA coin was once only $0.12, but in April 2022, the price of LUNA coin soared to $119.5, attracting the attention of a large number of investors. During this period, LUNA currency was considered the "Moutai currency circle", and many people believed it was a good opportunity to make money.
precursor to collapse
As an algorithmic stablecoin, the price of UST should always remain at $1 to give investors greater confidence. However, on May 8, 2022, as the UST price was at 95 cents and was still unable to return to 1 US dollar, the information that UST was unanchored continued to ferment through market exchanges. Investors quickly reacted to this huge risk and began selling UST on a large scale.
In order to increase the price of UST to US$1, the number of LUNA is continuously increased. After the additional issuance, the price of LUNA continued to fall, but UST was gradually drifting away from its anchor. This series of events caused panic in the market, and many people began to question the design of the Terra team and the future of LUNA currency and UST.
The occurrence of a crash
On May 12, LUNA currency experienced a terrifying cliff-like collapse. Within 24 hours, nearly 400,000 users liquidated their positions, with a single liquidation amounting to US$10 million. The total liquidation value was nearly US$1 billion, or approximately 6.36 billion yuan. According to the Bloomberg Billionaires Index, some of the biggest names in the cryptocurrency industry have seen their net worth plummet during this period. BTC investors Cameron and Tyler Winklevoss each lost 40% of their wealth, and the founder of FTX also lost 50% of his personal wealth at the time. Brian, the founder of Coinbase, saw his personal wealth drop from US$13.7 billion to US$2.3 billion, an 83% evaporation.
In this crash, LUNA currency plunged 98% overnight, causing many people to lose their life savings. UST, which was supposed to be anchored at $1, fell to 26 cents, a record low, plunging 44% in 24 hours. People became more panicked and had a crisis of confidence in Terra, which eventually led to the selling of UST and LUNA.
Analysis of the causes of the crash
The collapse of LUNA currency is mainly due to the following reasons:
The fragility of algorithmic stablecoins: As an algorithmic stablecoin, the price of UST should always remain at $1, but in fact, there are huge risks in this design. Once the market loses confidence in UST, the price will drop rapidly, which will affect the price of LUNA currency.
Market panic: When the news of UST's de-anchoring came out, investors responded to this huge risk and began to sell UST and LUNA on a large scale, further exacerbating market panic.
Additional issuance of LUNA coins: In order to increase the price of UST to US$1, the number of LUNA coins is continuously increased, which causes the price of LUNA coins to continue to fall, eventually forming a vicious cycle.
Investor Experience: Many investors suffered heavy losses during this crash. One person who experienced it said: "I watched 900,000 yuan turn into 700 yuan." This huge financial loss makes many people cry without tears. Media news also published panic headlines, further exacerbating the panic in the market.
Conclusion: The collapse of LUNA currency has taught us a lesson, reminding us that we need to be cautious when investing in cryptocurrencies. While the cryptocurrency market is full of opportunities, it is also full of risks. Investors should fully understand the projects they invest in and manage risks well.