Terra(LUNA)

Why is LUNA price crashing?

The price of LUNA dropped from over $100 to less than $1 between April and mid-May, 2022. Such price action is unprecedented for a top cryptocurrency in terms of market capitalization and has sent the entire crypto market into panic-mode, with BTC falling below $30,000. 

The reason behind LUNA's price crash is the de-pegging of Terra's algorithmic stablecoin UST. Supposed to trade at $1, UST has been trading well below $0.50 as of May 11, 2022, and since UST holders can burn 1 UST for $1 worth of LUNA, the discount on UST has presented an arbitrage opportunity for traders who can continue to purchase cheap UST to mint more LUNA and sell it on the market. Given how the UST de-peg has resulted in a "bank run" of sorts, the over-supply of UST on the market coupled with this arbitrage opportunity has weighed down on the price of LUNA.

Earlier, community members were hoping for LUNA founder Do Kwon to announce a bailout of sorts, where the ecosystem would raise funds from external parties to bring UST back to its $1 peg and close out the arbitrage opportunity. However, no such development materialized and earlier, on May 11, 2022, Do Kwon announced his intention to let market forces take their course and allow UST to reclaim its peg on its own. This would, in the words of Kwon "come at a high cost to UST and LUNA holders" who will see their holdings significantly devalued.

Whether the price of LUNA recovers or not remains to be seen, but the market will be keeping an eye on UST to see if the stablecoin manages to recover its peg anytime soon. That being said, it is feared that this latest incident will provide fuel to regulators already keen to clamp down on crypto stablecoins.