Effects of Luna Crash on Crypto Market

Effects of Luna Crash on Crypto Market

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What is Luna?

You are not alone in investigating the reason why Luna crashed. Almost 500 researchers search about it every month as per the keyword tool Ahrefs. So, let us see briefly what is Luna and its impact on the crypto space? 

Luna, a token of Terra, established by Korean Firm Terraform Labs, reached the peak of $117 in April, and then fell to approximately $0.00000112. This has jolted the whole crypto space, having one-seventh market capitalization as per CoinMarketCap. However, after its fall it was rank 214th as of June 1, 2022.

The operating mechanism of Luna

The purpose of Luna was to establish stable coins by integrating features of DeFi with non-volatile money. It was considered a protocol token or staking token as it played a key role in the system. In order to implement this integration, blockchain technology-initiated Terra USD (UST) and LUNA to achieve this objective. Terra USD (UST) was minted by burning LUNA and swapped for LUNA.

The Stable Coins were designed to be a haven for speculators who think the cryptocurrency was a risky investment. This has become a self-fulfilling prophecy for Luna investors.

Why the crash?

In May 2022, Luna was hit by an intense crash in its price. A bearish trend was seen in the crypto market where bitcoin was facing a 12-month low price in May 2022. Whereas Luna hit a $40 low. Overall, the crypto market was at its lowest price. On the same ground, Luna lost a $1 peg. The algorithm designed to support the duality of Luna and Terra backfired, as the burning was not successful as it burned more Terra than existed. As a contingency plan, a new Luna was introduced to leave behind old discrepancies.

Is it beneficial?

The crash of Luna has left the investors in a state of dilemma, the trust in blockchain was almost lost, leaving Luna’s all-time bearish investments. The highest and second highest cryptocurrencies i.e., bitcoin and Ethereum faced the backlash of low selling as stablecoins. The volatility in the crypto space gave rise to questions regarding the stability of stable coins. Will Luna ever recover? Although Luna climbed up a bit, but still, it is a long path to recovery. The crash of Luna has not only impacted crypto coins but also, other crypto collectibles such as non-fungible tokens, borrowing, and lending of cryptocurrencies. 

Final Talk

The critics of the crypto community warn against rapid U-shaped recovery but over a while, stability of coins will be achieved. However, this is not the first time crypto has come across the recession phase. It has previously survived, and it will survive in the future as well. We can also see a new trend of investors looking for regulated crypto markets that involve intermediation.

There are millions of opportunities in the crypto world, investors just need to be patient and let go of the Luna crash as a learning experience.