UST LUNA crash is just a preview of what’s to come—winter is officially here

Getting your Trinity Audio player ready...

It should have been obvious that something was off when JPEGs of apes were selling for hundreds of thousands of dollars. However, in a tale as old as time, greed blinded many to the flashing warning signs, and now the digital currency markets are in full-blown meltdown with the implosion of the algorithmic stablecoin UST leading the charge.

Yet, what many still don’t realize is that the implosion of the Terra Money ecosystem is just the beginning. Bigger tsunamis will follow the initial tidal wave, and the bear market many saw in 2018-2019 will look like child’s play compared to what happens this time.

What happened to UST, and why is it important?

For a full overview of what happened to UST, read this excellent overview by CoinGeek’s Jon Southurst. In short, an algorithmic stablecoin lost its peg to the dollar, causing investors to run for the exits. As a result of how this particular stablecoin works, the redemptions caused the algorithm to print mass amounts of the associated LUNA token, causing it to crater from $100+ to pennies virtually overnight.

$LUNA and $UST developers say this week's crash was caused by a coordinated attack from hedge funds and big banks

— Market Rebellion (@MarketRebels) May 11, 2022

While speculation is running rampant that UST lost its peg due to a coordinated attack, the cause doesn’t matter. Millions of retail investors who thought they had struck it rich have been left penniless, VCs who backed the project like Mike Novogratz have gone radio silent, and the U.S. Secretary of the Treasury, Janet Yellen, is already using the collapse to hammer home the need for more regulation. Sadly, there are also unverified claims of several suicides due to the UST/LUNA implosion, highlighting the seriousness of what can happen when these unsustainable systems go under.

Yet, the collapse of the Terra Money ecosystem and the subsequent panic in digital assets of all kinds is only the beginning. A much larger problem will manifest sooner rather than later.

Tether has lost its peg, and holders are running for the exits

At CoinGeek, we’ve been warning readers for years that the largest stablecoin by market cap, Tether, is the biggest fraud the world has ever seen. Tether has repeatedly refused to prove its claim that it is backed 1:1 to the USD, has been caught lying outright, leading to the NYAG banning it from the state, and several of its executives are under investigation for bank fraud by the U.S. Department of Justice.

As if all of that wasn’t worrying enough, Tether has lost its peg to the USD amidst the chaos surrounding the UST collapse. Some Tether holders are clearly spooked, with at least one taking a huge loss to move into Circle’s USDC.

Someone firesold $520M USDT paying 400% premium to get out to just $130M USDC. It pushed the USDT peg to .995. That means 10B USDT need to be sold to crash the peg to 0.9. Analysis? @Bitfinexed @BlackRock pic.twitter.com/noh0RbYuNN

— Jerry David Chan (@digitsu) May 12, 2022

It’s unclear why anyone would take a haircut of several hundred million dollars to exit from one stablecoin into another. Could this be a test to see what it would take to break Tether’s peg, or could it be someone who knows something taking whatever they can get to exit USDT immediately?

Digital currency speculators should be asking themselves; if the collapse of a comparatively small stablecoin (UST) can cause such an epic meltdown in the markets, what will happen when Tether goes belly up? Those who say it can’t or won’t happen should ask themselves why Tether point blank refuses to publicly prove it is backed 1:1 and why its word is enough given that it has been repeatedly caught lying in the past?

Regulations are coming, and many stablecoins won’t survive

For anyone paying attention, the writing has been on the wall for a year or two now; the Wild West era is over, and regulations will tame the digital currency industry. Secretary Yellen, powerful politicians in the EU, and others are calling for tougher regulations on stablecoins, meaning the tide is about to go out. We’re soon going to find out who is swimming naked.

When stablecoin issuers are forced to prove their reserves publicly and adhere to similar regulations as banks, companies like Tether will have nowhere to hide. What will happen to the prices of digital currencies like BTC and ETH when they go under? Will there ever be another bull market, or is this the end of the speculative phase of ‘crypto’ and a retreat to utility? Will exchanges like Binance survive, given that most of their volume is in USDT?

Time will answer these questions, but it’s not looking good right now, and as the implosion of USD/LUNA shows, the consequences of what follows will be dire. Truthfully, we haven’t seen anything yet.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.