Big Bitcoin Sell-Off in May

What is going on with Crypto markets?

Bitcoin price climbed up to $40,000 after the FED announcement on the 4th of May, and it started falling shortly after. Since then, we have been witnessing a historical sell-off. Bitcoin price is currently trading below $28,000, which is the year low.

The leading part behind this crypto market crush belongs to Luna and its stablecoin UST. UST is an algorithmic stablecoin founded by Luna’s Terraform labs. UST is a different stablecoin than the other common stablecoins we are used to. UST is not backed by a real commodity. It is just a line of code like Bitcoin.

Why do Algorithmic stablecoins offer high returns?

Since its release, UST climbed up and took its place among the top three stablecoins in 2021. The most charming thing about UST was its high return offerings. When you stake UST, you could get more than 20% APR on UST. Of course, it is way lower now.

Who can say no, when someone offers bigger than 20% APY on USD? Many high-risk investors started flowing their capital into the Anchor platform, where you can stake UST. The Anchor platform works the same way as other decentralized finance apps do. The platform generates revenue from borrowers and distributes its income among the stakeholders. It was debatable if the platform was successful enough to offer such a significant return. Maybe it was a temporary promotion to make an impressive start for investors.

Luna Foundation Guard’s treasury holds Bitcoin as a reserve to make its stablecoin more trustworthy. We will call them LFG shortly. LFG has more than 42,000 Bitcoin in its reserves, and its value is over 2 Billion USD. LFG became the biggest Bitcoin buyer in 2022. Do Kwon, Co-founder and CEO of Terraform Labs, shared a tweet and claimed that the LFG still holds the Bitcoin reserves but loaned them to market makers when UST was depegged to USD.

What are algorithmic stablecoins?

Stablecoins are a cryptocurrency with a stable price pegged to another real-life or digital asset price. We need stablecoins because of high volatile crypto prices. Stablecoins are used as a unit of measurement. Transactions and trades are more manageable and less fluctuant when you use stablecoins. Dollar stablecoins are the most used stablecoins. USDT, BUSD, and USDC are the leading stablecoins in the market, and their price is pegged to USD. One USDT is always one USD, or one BUSD is always one USD.

Such stablecoins, USDT, USDC, and BUSD, are issued by private companies. The issuing company promises to hold enough USD reserves for each digital stablecoin they issue. They are partly financially regulated and audited by third parties to ensure their client’s trust.

The much-discussed stablecoins are algorithmic ones. Algorithmic stablecoins are smart contracts on a blockchain providing a digital cryptocurrency with a stable price. There is no real-life asset held in reserves. This is a revolutionary step in decentralized crypto markets because algorithmic stablecoins let the price of a USD become a unit of measurement. Luna foundation’s stablecoin UST rose rapidly among others and became the third biggest stablecoin in the market in 2021.

The history of the USD price

USD became the world’s official reserve currency when the Bretton-Woods agreement was signed after world war two. USD price was pegged to Gold’s price. It was very simple back then. But it is water under the bridge now. USD price depegged the price of Gold at the time.

The agreement was forgotten. The critical corner was the 2018 mortgage crisis. US government decided to bail out banks during the great recession and printed massive amounts of Dollars. The FED was holding less than one billion USD before the great recession. When it was 2013, The FED held more than 4 billion Dollars, printed without needing a gold reserve.

Why do we need algorithmic stablecoins?

Bitcoin is leading the crypto world and insisting on democratizing the financial world, and different crypto projects emerge to solve our world’s problems. Luna Foundation’s algorithmic stablecoin UST was one of them. Since the current situation allows the US government to print as much as USD it needs, USD is losing its throne as a global reserve currency. USD is more like a measurement unit now. We measure the length in meters, weight in grams, time in seconds, and currencies in dollar. So we can use one unit of USD in trades and exchanges between different cryptocurrencies.