What the LUNA Crash Means For The Crypto Market

In case you missed it, LUNA used to be one of the biggest cryptocurrencies on the planet, but now, it’s absolutely worthless. People have collectively lost billions of dollars overnight, and no one really knows what this means in the long run.

LUNA was the native cryptocurrency of a project called “Terra”. Terra was described on its website as “programmable money for the internet”. It was meant to be one of the most revolutionary crypto platforms ever created. It was a public blockchain platform that used decentralized stablecoins in its algorithm in order to make decentralized finance more accessible to the masses. That’s a bit of a mouthful, but for a more simplified explanation — stablecoins are cryptocurrencies that are pegged to a fiat currency. DeFi is the crypto alternative to regular financing, but it has often been seen as risky due to the volatility of crypto.

Now, Terra using stablecoins in its DeFi strategy, it created a much safer way for people to lend and borrow money using crypto. There wasn’t really a chance of the lender or borrower losing all of their money overnight due to some sort of crypto crash — at least that’s what people thought at first. Don’t get me wrong, a lot of people benefited from using the Terra platform or by investing in its LUNA token. It quickly rose up the ranks and became one of the top 5 largest cryptocurrencies on the planet based on its market cap of over $40 billion.

LUNA’s price went from being around $1.5 at the beginning of 2021 reaching an all-time high of over $116 in April of 2022. By all means, this was one of the most successful cryptocurrencies of the past year. But it all changed in May of 2022 when the US Federal Reserve announced it would be increasing interest rates by half a percentage point for the first time in over 20 years. Higher interest rates meant people were less likely to invest in high-risk volatile assets like crypto or even stocks, and as a result, the crypto market as a whole crashed.

But LUNA crashed horribly, but why was that? Well, it basically had to do with the fact that its value was backed by a pegged asset, in this case, the TerraUSD. The TerraUSD was pegged to the USD, but after the announcement of the interest rate hike, the volatility caused it to lose a lot of value in comparison to the USD, which, in turn, meant that it was unpegged from the USD. LUNA essentially lost the main asset that was giving it value. This was unlike most other cryptocurrencies, that weren’t backed by any asset at all. LUNA’s main selling point — which was the fact that it was backed by an asset — ended up being the primary factor in its downfall.

So how much did LUNA fall, exactly? On May 6, 2022, LUNA was trading at around $81, which was down from its $116 peak just a few weeks ago, because of this, a lot of traders — especially new traders — decided they would invest in LUNA while the price was still low. I personally know a couple of people that made their first-ever crypto investment in LUNA when the price reached around $80. The reason for that is pretty simple, a lot of people see that a “hot investment” — like LUNA had been for the past year — is suddenly very low in price. In turn, they decide to invest a whole bunch of money in the asset in hopes that the price has to return back to “normal”, right? Well, that didn’t end up being the case. By May 8, LUNA’s price was down to the 60s. But of course, there was still a “chance” for it to bounce back.

But no, by May 11, LUNA crashed to under $2. It went from $80 to $2 in a matter of days, and investors — both experienced and amateurs — were freaking out. There hadn’t been a crash of this scale in the crypto world for a long time. This was literally one of the top cryptocurrencies on the planet, and it lost almost all of its value overnight. A few days pass by, and LUNA is officially under 1 cent. It’s delisted from almost every crypto exchange out there, and the crypto market as a whole is on a downward spiral.

Of course, you should remember the main reason why crypto prices fell — rising interest rates. A rise in interest rates is going to cut down on spending and risky investments in general. The cryptocurrency was never expected to do well at a time like this. However, the fact that Luna, one of the most popular cryptocurrencies in the world, dropped on such a massive scale has horrible implications for the crypto industry as a whole.

Let’s go back to my point of a lot of people investing in LUNA for the first time. As I mentioned, a lot of new investors that I personally know decided it was a good idea to invest in LUNA because of its “low” price of $81. Now that all of those people have presumably lost all of their money, or in a best-case scenario, they just didn’t earn any returns, it’s highly unlikely that these investors will have a positive outlook on cryptocurrency in general. But it’s not just the people that did invest, it’s also all of the people that didn’t invest.

For example, if anyone reads the news about how LUNA went from being in the top 5 to having almost no investors left, they’re going to think twice before they ever invest in crypto again. This crash is having a disastrous effect on the reputation of crypto and how much trust people still have in crypto. Of course, not all of it is unreasonable, but reputation and trustworthiness mean everything in the world of crypto. It’s very easy to ruin a reputation, it’s a lot harder to clean it up.

But this LUNA crash teaches all of us another lesson — there’s no “perfect” crypto project. LUNA was always pictured as the perfect investment since it had all the fundamentals and safety features of a “traditional” investment — due to the fact that it was backed by assets — while also having all of the fundamentals of a cryptocurrency. This is exactly why it got so massively popular in such a short period of time. People thought it was flawless. On top of that, it really was a great project, no one can deny that. That was, until, interest rates were increased.

Terra clearly didn’t have a contingency plan on what to do if the interest rates would ever increase. They didn’t even see it as a possibility. But perhaps, it was because of Terra’s lapse in judgment that we will see future projects in crypto that keep all of this in mind as well. I’m hearing a lot of doomer talk because of the collapse of LUNA. Many people think that there’s no way that crypto can succeed again, but that is quite unlikely.

In reality, the crypto world is already bouncing back. Take a look at Bitcoin, for example. Its price went from $38,000 before the crash to around $27,000 after the crash. This, of course, is massive. Many people thought that Bitcoin would go the LUNA route as well, but this did not happen. Instead, Bitcoin eventually recovered to $30,000, which is still far from a solid recovery, but it shows that a lot of cryptocurrencies still have a lot of life left in them. Ethereum went from $2,900 before the crash to $1,900 after it, but it too recovered to over $2,100. In short, these cryptocurrencies aren’t going anywhere. It’s very likely that they will recover eventually in the future.

As for LUNA, it was just the lack of a plan. In the future, almost every crypto developer will have LUNA in mind whenever they create a new project. They won’t make the same mistakes that LUNA did. But as I’ve mentioned, the reputation of cryptocurrency is damaged, but this might actually be a good thing.

This is going to keep away a lot of the cash-grab developers from creating scam cryptos, but it’s not going to deter people who have devoted their life to crypto development. These developers are going to create newer, better cryptos while existing projects like Ethereum are also going to get better and better over time. In the future, we might even see a 2021-like boom in the crypto market. You have to remember that despite the crash, the market is still much larger than it was before 2021. On top of that, this isn’t the first time the crypto market crashed. It happened once in the summer of 2021, and it was able to recover to brand new peaks by the end of that year.

Of course, no one can predict the “timeline” of when the recovery will actually happen, but with time, the reputation of crypto will improve, and it might just be a good investment opportunity for everyone.

Do you think the crypto market is going to bounce back? Let me know in the comments below!

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