The collapse of Luna cryptocurrency, the token of the Terra protocol, has been met with a mixture of shock, disbelief, and a certain degree of hand-wringing self-righteousness – the latter largely from crypto sceptics, revelling in the opportunity to say, “I told you so”.

In a way, it was an accident waiting to happen. Luna and its associated stablecoin, UST, was built on an algorithm that rendered it inherently unstable, unlike its peers USDT and USDC which are backed by actual reserves.

There are even parallels to be drawn with events in the traditional financial world: from sub-prime mortgage lending in the build up to 2008, to the collapse of Long-Term Capital Management a decade earlier.

While the post-mortem is still being completed, the growing sense is that the situation should be specific to Terra. After all, what could you actually do with the token other than exchange it? Its creators may have pretended it had a purpose, but that doesn’t mean it really did.

Whatever the consequences of Terra’s fall to earth, it remains the case that the value of fiat currency is being eroded almost by the week. Governments have printed mind-boggling sums of money, with up to 60% of the US dollars in existence printed between January 2020 and October 2021, and we can see the results of that in inflation figures at multi-decade highs.

The Bank of England predicts further price rises ahead this year, which only underlines why cryptocurrencies were created in the first place. But there is now something like 20,000 different crypto tokens in the world – what possible need could there be for so many when fiat currencies make up just one-hundredth of this figure?

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Undoubtedly, a significant portion of these is created out of nothing more than their owners’ greed and, lacking any plausible use whatsoever, they will come back down to earth with a bang when market sentiment turns sour.

Events like this are not new and can be tough experiences for those caught up in them, but they do have a useful, almost Darwinian, effect.

This time, although there are some worthwhile smaller projects out there, many of those valued at under $1 billion prior to the Terra crash will probably go nowhere from this point on. It is also likely to mean we see fewer launches on exchanges in the short term, which may turn out to be no bad thing.

Perhaps of as much importance, it may change the perceptions of many people who invested in cryptocurrencies looking to make a quick buck. An estimated 40% of Bitcoin holders now find themselves underwater and, while Bitcoin holders have historically done well over several years, it serves to highlight that this is no short-term game.

The point is, crypto, when it’s done correctly, should not be seen as a get-rich-quick scheme. It should be about making real things happen and delivering real value to the people that hold tokens. What the next few weeks and months will hopefully do is weed out some of the coins and projects that only pretend to have purpose.

No one knows anything for sure in the world of cryptocurrency. While many people will be licking their wounds from the experience of Terra and preparing for another crypto winter, the strong will survive and, with that, bolster the case for projects with a real reason to exist.

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