Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup

STABLECOIN DEATH SPIRAL? TerraUSD Becomes Terra0.5USD Overnight

May 11, 2022 By E.J. Smith

By Luckymane @ Shutterstock.com

A selloff is currently hitting cryptocurrencies, and one, in particular, is beginning to look like an emperor with no clothes.

TerraUSD, a so-called “stablecoin,” because of its purported peg to the dollar at 1 to 1, has lost around half its value overnight. The loss was so great, according to industry analysts, that it could even enter what’s known as a “death spiral.”

According to The Wall Street Journal, TerraUSD uses ” financial engineering to maintain its link to the dollar.” Does that sound very “stable,” to you? Caitlin Ostroff and Elaine Yu explain the breakdown, writing:

The break in TerraUSD’s peg began over the weekend with a series of large withdrawals of TerraUSD from Anchor Protocol, a sort of decentralized bank for crypto investors.

Anchor Protocol is built on the technology of the same Terra blockchain network that TerraUSD is based on. It had been a major factor in the growth of the stablecoin in recent months by allowing crypto investors to earn returns of nearly 20% annually by lending out their TerraUSD holdings.

At the same time, TerraUSD was also sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges. The sudden outflow of money spooked some traders who began selling TerraUSD and its sister token Luna. Before its peg was broken, TerraUSD was the third-largest stablecoin with a total market value of $18 billion.

TerraUSD’s fall to 23 cents at around 3:30 a.m. ET marked a 70% drop from its value 24 hours earlier, according to CoinDesk.

Even as TerraUSD began regaining some value after hitting its low, Luna continued to fall. The token was down 97% from the previous 24 hours at 8:53 a.m. ET, trading at 99 cents.

“I understand the last 72 hours have been extremely tough on all of you—know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” wrote Do Kwon, the South Korean developer who created TerraUSD, on Twitter on Wednesday.

Stablecoins have surged in popularity the past two years and now act as the grease that moves the gears of the cryptocurrency ecosystem. Traders prefer to buy coins such as bitcoin, ether and dogecoin using digital assets that are pegged to the dollar because when they buy or sell, the price is only moving on one side. They also allow for fast trading without the settlement times associated with government-issued currencies, which can take days.

The price of bitcoin fell to $29,460.20 Wednesday, down 4.8% from its 5 p.m. ET level Tuesday. It has lost about 25% of its value over the past week alone.

In the past, TerraUSD maintained its $1 price by relying on traders who acted as its backstop. When it fell below the peg, traders would “burn” the stablecoin—removing it from circulation—by exchanging TerraUSD for $1 worth of new units of Luna. That action reduced the supply of TerraUSD and raised its price.

Conversely, when TerraUSD’s value rose above $1, traders could burn Luna and create new TerraUSD, thus increasing the supply of the stablecoin and lowering its price back toward $1.

Such a model has drawn criticism because it relies on people’s collective willingness to support the cryptocurrency. Without that, the stablecoin can quickly sink, in what industry participants have described as a “death spiral.”

Action Line: Your Survival Guy believes in the potential value of blockchain technologies, but anyone looking to avoid volatility should probably avoid cryptocurrency speculation. Instead, invest in the power of compound interest and individual securities. If you need help, let me know.

Originally posted on Your Survival Guy. 

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Reports of Oil’s Death Greatly Exaggerated
  • Author
  • Recent Posts
E.J. Smith
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris.

Please get in touch with E.J. at ejsmith@youngresearch.com
Latest posts by E.J. Smith (see all)
  • Your Retirement Life: Let the Slow and Steady Be Your Way of LIFE - August 9, 2022
  • If the Phone Doesn’t Ring…It’s Me - August 8, 2022
  • DESANTIS RESISTS: Suspends Soros-Funded Destruction of America - August 5, 2022

Search Young Research

Most Popular

  • The Key Ingredient to an $8 Million Estate Is This
  • SCHUMER-MANCHIN: An "Inflation" Bill that Doesn't Fight Inflation
  • NO GO ZONES: The Wealthy Protected, the Rest Left to Rot
  • Do Governments Cause Recessions On Purpose?
  • The Power of a Compound Interest Table
  • American Manufacturers ALARMED by Schumer-Manchin Tax Hike Plan
  • Is a Housing Market Crash Next?
  • Do You Have $500,000 in Savings? Avoid This Nightmare
  • Field of Dreams: You Too Can Live Like a Billionaire
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • Pelosi’s Trip a “Pointless Gesture That Brought Us Closer to Military Conflict”
  • RIP David McCullough
  • Your Retirement Life: Let the Slow and Steady Be Your Way of LIFE
  • Who Benefits from and Orchestrated the Trump Raid?
  • California’s Progressive Liberals Have Created a Monster
  • DeSantis Leadership: Good Government and Smart Politics
  • The Most Vulnerable Will Suffer at the Hands of Anthony Fauci
  • If the Phone Doesn’t Ring…It’s Me
  • REGION AT RISK? Chaos of War Surrounds Ukrainian Nuclear Plant
  • Did China Buy Land in North Dakota to Spy on Air Force Base?

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2022 | Terms & Conditions

 

Loading Comments...
 

    loading Cancel
    Post was not sent - check your email addresses!
    Email check failed, please try again
    Sorry, your blog cannot share posts by email.