The Terra LUNA crash last month sent many investors back in their returns. The crypto market generally crashed the previous month, but the 80% deep dive in Terra wasn’t funny. The panic by the investors to pull out of the crypto crash intensified the fall of many coins. Generally, the crypto market suffered a loss estimated at $400 billion in a few days.
Surprisingly, a new report has emerged showing that while the Whales were dumping their holdings, the retailers were busy buying up Terra. According to the Terra investor who made the report, many smaller wallets were stocking up the coin amid the panic.
New findings that many withdrawals and swaps were going on. Most of the outflows were going on Terra’s Anchor Protocol during the early days of the crash in May.
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The Terra crash caused a lot of pain in the crypto market. According to the Policy head at Blockchain Association, Jake Chervinsky, the crash week was one of the most painful days in the history of cryptocurrency.
Diverse Reasons For Terra Crash
Many people have speculated several reasons for the crash. But one glaring reason is the operations of the Terra’s Anchor Protocol. According to how stablecoins operate, they’re backed by reserves which should always be adequate to pay off investors even if they all pull out at the same time.
But UST is a stablecoin that operates with algorithms relying on code. This coin needs continuous market activities and the belief that it is pegged to the dollars to work. Also, many people trusted the link to its base currency, LUNA.
So when Anchor Protocol, owned by Terra, came up with a 20% return on lending six months ago, investors rushed in to cash out the ample opportunity.
The UST started seeing massive purchases as all the investors targeted the 20% returns. Of course, many critics called it a Ponzi scheme, and even the Terra team members acknowledged it but argued that it was a means of creating awareness for the protocol.
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Unfortunately, many large investors decided to pull out their investments to make big money through short-selling. As a result, UST depegged from the USD. Many people panicked and wanted to get all their earned interest out before a further crash. This bank-run also crashed Luna and brought UST to 12 cents and Luna to fractions of a penny.
One other reason for the Terra crash might be attributed to the crypto sentiment that was going on following the Federal Reserve’s rate increase. Also, the increasing inflation affected the market at that time too.
So, there were a lot of issues going on, and people were already worried about the hope of crypto investments. Terra Luna’s crash also facilitated the already tethering crypto market crash.
Even the attempts by small depositors to increase their holdings on Anchor didn’t work because their overall liquidity is just a fraction of what is needed on the protocol.
Featured image from Pixabay, chart from TradingView.com