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Weekly crypto news: LUNA and UST take crypto market down

Weekly crypto news: LUNA and UST take crypto market down

Panic has set in in the crypto market. The past week (May 6, 2022 to May 13) was by far the worst week for crypto this year. Bitcoin (BTC) declined the past 7 days by approximately 30%, from €37,350 to €27,220 at the time of writing.

Experts say the declines have been triggered by current macroeconomic factors, such as high persistent inflation, interest rate hikes and the war in Ukraine. However, what has thrown oil on the fire is the whole situation surrounding Terra (LUNA) and UST. These two coins have sparked the real panic in the market. But why exactly? And will it all still work out? You can read all this and more in the weekly crypto news overview!

What happened to UST and LUNA?

Terra (LUNA) and TerraUSD (UST) were until recently among the top 10 largest cryptocurrencies in terms of market capitalization. LUNA reached an all-time high of €106 earlier this year and UST is a stablecoin that was supposed to be worth a dollar each (1 UST = 1$). LUNA is now at €0.00003 and is still very volatile. The stablecoin UST has also proven to be not so stable, as it now stands at €0.157.

How can LUNA have fallen by over 99% and how can a stablecoin suddenly lose its intended value of $1 you ask?

LUNA's loss of value is mainly due to UST's loss of value. Until UST returns to $1, LUNA will continue to lose value through some sort of arbitrage loop. What about that loop?

One can exchange 1 UST for $1 of LUNA on the Terra blockchain. When this happens, UST's supply becomes smaller and LUNA's supply becomes larger, because 1 UST is "burnt" and 1 LUNA is "minted". If the value of 1 UST is equal to $1, this should not cause any problems, but now that the value of 1 UST is no longer equal to the dollar, there are arbitrage opportunities. Namely, one can buy 1 UST for $0.163 (€0.157), exchange it for $1 of LUNA and sell that LUNA for profit.

This is also exactly what has been happening over the past few days. The supply of LUNA increased dramatically due to this arbitrage opportunity. According to the law of supply and demand, the price falls.

The problem is that this loop remains possible, and thus the price of LUNA will continue to fall, until UST equals $1 again. But how come UST has decoupled from the dollar?

There are rumors about this all being an attack. An unknown group with a lot of money that‘s attacking UST, as it were, and allowed it to fall below the dollar artificially. As a result, the organization behind UST started selling a lot of Bitcoin - which served as a hedge to ensure the UST value of $1. This caused panic in the market, as Bitcoin fell hard.

The panic surrounding the loss of value of UST and Bitcoin caused even more people to want to convert their UST to another stablecoin, putting even more selling pressure on the stablecoin.

Meanwhile, confidence in UST and LUNA has disappeared and panic has taken over the market, but there is still hope, according to Terra's founder, Do Kwon. He put together a very complex and comprehensive plan to get the value of UST back to $1. For now, that is the most important thing to save these two coins, and it would benefit the rest of the crypto market as well.

Good to know: USDC, BUSD and TUSD are not algorithmic stablecoins like UST.

Instagram is experimenting with NFTs

Fortunately, there were also some positive news items for the crypto industry. NFTs (non-fungible tokens) from some of the most popular cryptocurrency blockchains are coming to Instagram.

The Meta-owned social media platform is planning NFT integrations for Ethereum, Polygon, Solana and Flow. Those networks host the vast majority of digital collectibles trading, with Ethereum and its Bored Apes leading the way.

The pilot will involve a small group of NFT enthusiasts based in the US. It was not immediately clear whether Instagram would support NFTs from all four blockchains at launch.

The decision likely means a rush for new cultural visibility for NFTs. Instagram has more than a billion monthly active users; many of them use the platform to promote and market their art.

El Salvador buys 500 BTC in the dip

El Salvador, known for being the first country to legalize Bitcoin, has made another major Bitcoin purchase. The country bought 500 BTC last Monday for $15.3 million.

Nayib Bukele, the president of El Salvador, posted a tweet saying, "El Salvador just bought the dip! 500 coins at an average USD price of ~$30,744. #Bitcoin."

This is now the 10th time the country has made a Bitcoin purchase, and the largest so far. The last purchase was on January 21, when the country bought 410 Bitcoin at an average price of $36,585.

El Salvador now owns a total of 2301 Bitcoin, which amounts to about €62 million at current prices.

WordPress websites can now accept Dogecoin as a payment method

DogeDesigner, a UI/UX and graphic designer with the Dogecoin Foundation, recently unveiled a new plugin that allows website owners to begin accepting Dogecoin payments. The plugin developed by a Dogecoin developer would allow more than 455 million WordPress websites to use the WooCommerce plugin as an "Easy Dogecoin Gateway."

This is obviously a welcome development for memecoin. However, the response has not been as great as expected. As of Monday morning, three days after the announcement of this payment gateway, there are less than 10 active installations of this plugin. It is still in the early stages and usage may increase once users confirm that it works as intended.

Which countries are now engaged in crypto?

Since there have been many developments in the past year on a country-by-country basis when it comes to crypto and crypto-regulation, we have decided to add a recurring heading to the weekly news report. Under this heading, you will read the latest news about countries and states that are involved in crypto.

The United Kingdom includes crypto in its legal agenda

The United Kingdom has introduced two bills, both related to the seizure of and support for cryptocurrencies.

In a release issued Tuesday by the UK Prime Minister's Office, the government said it will tackle crypto-regulation in the country with the introduction of the Financial Services and Markets Bill and the Economic Crime and Corporate Transparency Bill.

The former aims to strengthen the country's financial services sector, including by supporting "the safe adoption of cryptocurrencies." The Crime and Transparency Bill proposes to "create powers to more quickly and easily seize and recover crypto assets" to reduce the risks to individuals targeted by ransomware attacks.

Utah governor approves task force on blockchain and digital innovation

After nearly a three-year discussion about creating a task force to oversee blockchain and crypto initiatives, Utah Governor Spencer Cox has signed a bill to create the Blockchain and Digital Innovation Task Force.

The Utah State Legislature first saw the introduction of the House bill (H.B. 335) in early February 2022, which took nearly two months to pass through several senates, the House and fiscal actions before it was finally signed by Governor Cox on March 24.

Some of the primary tasks assigned to the task force included making policy recommendations regarding blockchain and related technologies.

This was the most important crypto news of the week! Earlier this week, we also wrote about Gucci and crypto. Read the article "Gucci will accept crypto payments in stores" here.

Luc Smits van Oyen
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