Cryptocurrency and the fall of Terra Luna

You've probably heard of cryptocurrencies before, perhaps under the names bitcoin or litecoin. A relatively new but rapidly growing method of online payment carries numerous risks. The fall of Terra Luna exemplifies how fickle these digital currencies can be.

Let’s take a look at the basics of digital currency and how it works.

Cryptocurrency is a type of alternative payment system based on encryption methods. Cryptocurrencies can be used as both a currency and a virtual accounting system. It is due to the use of encryption technology. It is a mentoring payment system that allows anyone, anywhere, to send and receive money. Cryptocurrency payments exist solely as digital inputs to an online database describing specific transactions. This money cannot transferred in real world.

A cryptocurrency wallet is required in order to use cryptocurrencies. These wallets might be software that is kept on your computer or mobile device. It can also be accessed over the cloud. Wallets are the devices that store the encryption keys that prove your identity and connect you to your bitcoin.

Talking of bitcoin, it was the very first cryptocurrency. It was founded in 2009 and is still the most well-known. Much of the interest in cryptocurrencies is for profit trading, with speculators driving prices upward at times.

How does cryptocurrency work?

Let's take things slowly at first. Cryptocurrencies are based on the blockchain, a distributed public database that keeps track of all transactions and is updated by currency holders. Cryptocurrency is created through a process known as mining. It involves employing computer processing power to solve complex mathematical problems that result in coins. Users can also purchase the currencies through brokers, then store and spend them through encrypted wallets.

As previously stated, bitcoin owners have no tangible possessions. All you have is a key. You can use this key to move a record or a unit of measurement from one individual to another. Everything happens without the help of a reliable third party.

There are thousands of cryptocurrencies just like bitcoin. After Bitcoin, Ethereum or Ether is the most widely used cryptocurrency. It is a cryptocurrency-based blockchain platform. Another currency is litecoin. It is virtually identical to bitcoin. The difference is it moved faster to build new ideas, such as speedier payments and systems that enable more transactions. Ripple started as a distributed ledger system. Ripple is used to track a wide range of transactions. It was created in partnership with a number of financial organizations and banks.

How to buy, store and use cryptocurrencies?

First of all, You can choose a platform from which to buy cryptocurrency safely. Traditional brokers and cryptocurrency exchanges are the two most common venues. The final step is to fund your account and then invest in cryptocurrency using various payment apps.

Two terms are used, hot wallet and cold wallet for crypto wallets in which cryptocurrency is stored, To avoid hacking and theft, it's critical to keep your digital cash safe in these wallets.

When crypto was launched, it was designed to be a medium for everyday transactions, allowing anyone to buy anything. It might be as simple as a cup of coffee to a computer or as complex as real estate. However, it has yet to materialize. However, due to its growing popularity, some luxury products, automobiles, and insurance companies are also taking cryptocurrency as payment.

Is Cryptocurrency a volatile market?

Now that we've covered the fundamentals of cryptocurrency, let's look at the dangers and scams that this market has to offer.

Unfortunately, scams are common in the bitcoin sector. One explanation for this is blockchain transactions' "immutability": they cannot be reversed. Users have been duped by celebrity endorsements and bogus websites.

Shocking collapse of Terra Luna, a crypto catastrophe:

In the volatile world of cryptocurrencies, fortunes may be gained and lost swiftly. The investors were traumatized by Terra Luna's unexpected collapse. This tragedy has bolstered the argument that cryptocurrency is not a secure platform. One after another, crypto appears to be all red no matter which way you look.

Bitcoin and ether have reached their lowest points since 2020, with altcoins like dogecoin and Cardano faring even worse. Not only is the stock market being dragged down by these volatile economic conditions, but so is crypto.

Terra Luna - Stable coins:

. The Terra blockchain includes the UST stable coin and the Luna stable coin. Using the term stable coin, what a stable coin is?

It is a digital currency that is tied to a more stable currency. They are tied to the United States dollar. Stable coin tokens can be exchanged for dollars at any time. Stable coins are also a key component of DeFi, or decentralized finance because they enable cryptocurrency lending and borrowing.

What actually happened with the two popular digital stable coins?

The UST coin was supposed to have a fixed value of $1, however, on May 9, 2022, it was dropped. It is now only worth thirteen cents.

The Luna coin has experienced a spectacular crash in the crypto world. It used to be worth more than $40 billion. It has since dropped to $116. The collapse is incredible for something the size of Luna.

The collapse of the Luna cryptocurrency and its accompanying terraUSD stable coin, dubbed UST, is unusual. Hundreds of millions of dollars in bitcoin wealth have mysteriously gone. The important point is that if a stable coin can crash catastrophically, there is little chance for other coins.

You must be wondering about the cause of this abrupt collapse? What went wrong?

On May 7th, UST worth over $2 billion was unstaked. Immediately, hundreds of millions of dollars were sold. Such massive sales pushed the price lower. The impact of interest rate hikes on bitcoin pricing has been significant. The stable coin couldn't keep its value. Investors were concerned about the current situation. They hurried to sell their UST as soon as possible. In the week following the initial depeg, it fluctuated between 30 cents and 50 cents. It finally dropped to a consistent low of under 20 cents. Its market worth had dropped to $2 billion from $18 billion in early May. It was a difficult situation for Luna coin collectors. The current price was less than a tenth of a penny after peaking at just under $120 in April. The value of Luna tokens had almost completely evaporated.

Revival of Terra Luna? What did the founder say?

Do Kwon, the founder of Luna Foundation, reassured the public after the crash. He made comments via Twitter, stating that the peg would be reinstated. He would create a contentious proposal to restore the Terra Luna coin and devise plans after plans to recover.

However, prominent members of the bitcoin world have criticized his strategy.

What lessons you should learn from the fall of Terra Luna?

Such a monumental loss and financial disaster have left crypto investors scratching their heads. This event should cause everyone in the crypto community to reconsider their beliefs regarding stable coins, investing, and development.

It's worth noting that the most successful stable coins don't follow a completely "decentralized" paradigm. Their stable coin is backed by non-decentralized, highly liquid, and stable reserve assets. Private enterprises must examine these reserves on a regular basis. The purpose is to guarantee that USDT is properly backed and convertible.

A high market value does not always imply a sound investment. Don't rely on others and don't fall for the hype. Do your research and buy quality.

Stay humble and keep your pride in check. It is simple counsel, yet it is crucial. The founder of Terra, spoke with a popular streamer on the crypto sector just days before the collapse, suggesting that watching 95 percent of industry firms die over time would be "fun." What happened afterward is well known.

Therefore, Cryptocurrency might usher in a new era of financial innovation. It is also plagued by a severe lack of regulation, market manipulation, hacking, thefts, anonymity, and lack of transparency. Nobody will come to your rescue if your crypto investments fail. The developers who told you that everything was under control were unable to govern the market surrounding their stable coin in reality. So, take all you can from Terra's loss and re-evaluate all of your bets to make safer investments.

Back to blog