The Terra and Luna cryptocurrencies have lost over 99% of their value, reducing their market cap from over $40 billion to just $500 million.

Developed by South Korea-based Terraform Labs, the cryptoassets lost almost all their value in a matter of days. Once trading for $64 on May 9th, they fell to $0.11 on May 12th.

Their precipitous fall comes at a time when cryptoassets, from Bitcoin to NFTs, are seeing major falls in value.

What are Terra and Luna?

Terra is a public blockchain protocol, which provides a platform to support stablecoins, a kind of cryptocurrency pegged to conventional assets, such as US dollars or gold.

Stablecoins aim to provide the best of both crypto and fiat currencies – ease of use and anonymity paired with stability, allowing them to be used more easily as a means of exchange.

The Terra protocol supports two stablecoins, TerraUSD and Luna. The two are symbiotically linked, with Luna designed to stabilise TerraUSD and remove its volatility.

This means that Terra does not work like traditional asset-backed stablecoins.

Instead, one TerraUSD will always buy one dollar of Luna, which has its value determined by the market. So if Luna is trading for US$0.10, one TerraUSD is worth 10 Luna, while if its price is above the dollar, one TerraUSD buys less than one Luna.

In turn, one dollar’s worth of Luna always buys one TerraUSD.

This theoretically means that the difference between them always allows an investor to make a profit.

If TerraUSD is more valuable than a dollar, they can trade it for a dollar of Luna and then trade that for TerraUSD worth more than a dollar, making a profit. It TerraUSD is worth less than a dollar, they get a dollar’s worth of Luna, again making a profit.

That is how Terra maintains its peg to the US dollar. In theory, at least.

The collapse in Terra’s value came after it was depegged from the US dollar. This happened over the weekend, when a large number of TerraUSD were sold into other stablecoins. This caused the price of TerraUSD to fall. Since Luna is determined by market value, as its value fell, so too did the value of TerraUSD, leading to its current lows.

Despite attempts by the Luna Foundation Guard (LFG), which has other cryptoassets to back the value of Terra and Luna, the price fell and major crypto exchange Binance suspended withdrawals of the currency.

For people invested in Terra, the drop has wiped out billions in investments.

Crypto Crash

The fall of Terra and Luna comes as part of a greater fall in the value of cryptoassets.

Bitcoin, the flagship cryptocurrency, has seen significant declines in recent months. Since reaching new heights at the start of 2021, Bitcoin reached its peak in November last year when a single token cost over $64,000.

However, since then the currency has largely been in decline. It has seen a significant drop since the start of May, when a token was trading for around $39,000, and is now trading at $27,000. This marks less than half what it was going for at its peak.

This is still more than it went for before its latest surge – for most of 2020, Bitcoin was struggling to reach $10,000.

But the latest fall has led Yahoo News to report that 40% of Bitcoin investors are making a loss on their investments.

Other cryptoassets are seeing similar declines. Ethereum peaked in November at around $4,800, and has gone from under $3,000 at the start of May down to $2,000.

OpenSea, the biggest NFT marketplace, experienced its lowest daily trade volume on May the 8th, around $52m, despite a major $476m peak a week earlier. Bored Ape Yacht Club NFTs have been selling for around half what they were in April.

And an NFT of the first ever Tweet, which sold for $2.9m a year ago, sold for $280 last month, a fraction of its $480m list price.

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However, volatility has long been a feature of crypto markets. In fact, it is generally seen as a feature, allowing investors to ‘buy the dip’, investing when assets are cheap in the hope another resurgence will provide a hefty return.

This is not the first time Bitcoin and similar tokens have fallen in value. So far, each fall has seen a resurgence in later months.

In the wake of the recent crypto collapse, the Financial Conduct Authority (FCA) released a statement warning consumers about the risks of investing in unregulated assets.

“We have seen some recent social media posts regarding cryptoassets and non-fungible tokens (NFTs),” it said.

“The FCA has not been given regulatory oversight over direct investments in cryptoassets and NFTs. There are no consumer protections for those who buy any cryptoassets and NFTs, and they are not FSCS protected.

“As a result, if you buy cryptoassets you should be prepared to lose all the money you invest.”

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