Stablecoin TerraUSD "Breaks the Buck"
The Wall Street Journal reports "Cryptocurrency TerraUSD Falls Below Fixed Value, Triggering Selloff," which tells us, "One type of cryptocurrency, a so-called stablecoin, is meant to keep its value at $1. But on Monday, the third-biggest stablecoin, TerraUSD, fell as low as 89 cents, causing a flood of investors to sell their holdings. Stablecoins get their name from their being tied to the value of government-issued currencies, such as the dollar. These $1 pegs are usually backed by Treasurys, cash and other dollar debt that is easily sold in times of market stress." The article explains, "More than $18 billion was invested in TerraUSD as of this past weekend, making it the third-largest stablecoin, according to crypto data provider the Block. But unlike traditional stablecoins, TerraUSD is an algorithmic stablecoin. These pseudo dollars aren't necessarily backed by any assets at all, instead relying on financial engineering to maintain their link to the dollar. Such designs have been criticized by market observers as risky because they rely on traders to push the value back to $1 rather than having assets that continuously support the price. If traders aren't willing to buy them, coins can go into a so-called death spiral. TerraUSD has mostly maintained its dollar peg, but it has been broken in bouts of heavy volatility." The Journal writes, "The dislocation of TerraUSD from its peg caused some traders to panic and sell. To reinstate the peg, others began selling ether and buying TerraUSD, weighing on the dollar value of the second-largest cryptocurrency by market value. Some traders also sold bitcoin over the weekend in anticipation that the platform would need to sell its bitcoin reserves to support the peg.... Bitcoin fell 10% Monday to about $31,076 amid a broad selloff in the crypto markets. TerraUSD in Monday evening trading was at about 93 cents, after touching the low of 89 cents earlier, according to CoinMarketCap. Panic selling also hit the related Luna cryptocurrency, which has dropped 30% since Sunday, wiping out $5.6 billion of market value, CoinMarketCap data show. The Luna Foundation Guard, a nonprofit supporting Terra, said it voted to support TerraUSD by lending $750 million of bitcoin to trading firms to protect the stablecoin's peg and lending out an additional 750 million in TerraUSD to buy more bitcoin."
