This week, Luna, once among the world’s most valuable cryptocurrencies, experienced a dramatic crash that rippled through markets and left many investors in precarious positions.
In early May, Luna traded above $80, having reached about $118 at the start of April. Today, its price has drifted to cents, shedding most of its recent gains.
Bitcoin also slid, dipping below $30,000 after a period of stronger performance the year prior. Coinbase, the leading crypto exchange, reported declines and hit new low marks, according to data referenced by El Periódico de España.
All of this happened within five days. The cryptocurrency landscape endured a tumultuous week.
“It was a perfect storm,” said Fernando Gutiérrez, an analyst and crypto investor. “Rising ratios and loosening inflation are reshaping markets beyond crypto. Nasdaq stocks fell, and Luna’s collapse amplified the downturn.”
The outside forces of the real economy—inflation, interest rates, and corporate results—converged with the crypto market, helping drive Luna’s crash as its algorithmic stability mechanism failed.
Some people discussed the situation on Reddit, where Luna has a dedicated community. There are accounts of individuals who invested their life savings in the project. A user even described finding resources to prevent self-harm after losing everything overnight, underscoring the human impact of the crash.
“The panic was so intense that it dragged others down,” explained Diego Morín, an IG Spain analyst. “Some will claim this signals the end of cryptocurrencies, but it won’t. Stablecoins pegged to the dollar can be attacked, which might accelerate regulatory scrutiny.”
cursed algorithm
Most cryptocurrencies, including Bitcoin, are valued by supply and demand: demand pushes prices higher as more people buy, while supply increases can push prices down when people sell. That makes them highly volatile, with markets reacting even to a single tweet from prominent figures.
Luna’s distinct mechanism differed from the typical model. It was tied to a stablecoin called UST, which aimed to maintain near parity with a fiat currency.
Stablecoins are designed to hold a steady value, usually linked to a currency like the U.S. dollar. For Luna and UST, the target was UST = $1.
Unlike other stablecoins that carry real-money reserves, UST relied on an algorithmic approach to preserve parity. The system would mint or burn Luna to defend the peg, creating and removing Luna as needed to balance its value with the dollar.
Investors were attracted by the possibility of profiting when the peg deviated, buying Luna when UST fell and selling when it rose. The hope was that parity would hold.
The peg eventually broke. Gutiérrez posted a thread on Twitter outlining the factors behind the breakdown: a loss of investor confidence, Luna price declines, and the dollar peg loss, with some in the crypto community suggesting a coordinated attack.
“UST sales appeared to be driven by a single actor, though whether it was coordinated remains uncertain,” Gutiérrez noted.
In response, builders of UST/Luna made changes to the system, including plans to add Bitcoin as a backstop should the peg deviate. Those changes were still in progress, only weeks from completion.
When the system could no longer absorb the heavy selling, the reserves were deployed: Bitcoin was sold to support UST, but the move failed to stabilize the market and, in turn, pulled Bitcoin and other assets lower. This created a vicious cycle that dragged the broader market downward, according to Gutiérrez.
The analyst added that it was unclear how large the Bitcoin sales were or at what prices they occurred, but such a defensive strategy strained the market further.
Even so, the crisis in this cycle was modest compared with events such as Mt. Gox’s collapse in 2014, when investors lost about 5% of the market’s value. By comparison, losses in this week’s chaos reached around 2% at the time.
“Everything is in the Air”
The U.S. Treasury’s stance on stablecoins has been clear for months. Congressional discussions have urged issuers to meet the same banking-style standards as traditional financial institutions.
Following Luna’s collapse and the ensuing market drag, the Treasury secretary urged speed in finalizing regulatory measures.
“What we witnessed was a real-life demonstration of stablecoin risks, akin to bank runs in crisis moments,” a Treasury official remarked, as reported by the New York Times.
Morín warned that sentiment could drift toward fear, with some investors predicting further price drops for Bitcoin if panic spreads. He suggested that the current situation is likely to hasten regulation. “We may not know the full truth yet, but this could be a turning point. Cryptocurrencies may recover, but the present environment remains fragile and the market fears a potential recession.”
Gutiérrez added that Luna’s fall rattled Bitcoin and other assets for as long as the ecosystem has existed, raising concerns about a broader loss of confidence. Tether, the world’s largest stablecoin, also dipped below parity this week as panic spread. Analysts worry more declines could follow, even as some assets show tentative signs of recovery.
In the meantime, Terra’s creator, a Korean developer named Do Kwon, proposed a set of reforms to rebuild the currency and pledged to continue pushing the project forward. The broader crypto market rebounded somewhat on Friday, but Bitcoin remained below 30,000 and hit multi-year lows from 2020.