Terra’s UST Collapse Is Not The Main Culprit Behind Bitcoin Crash: Chainalysis

Chainalysis, a blockchain analytics platform, has published a report analyzing the Terra crash. According to the report, the Terra crash did escalate the downturn in the crypto market, however, it wasn’t the main factor.

The report links the recent crypto crash to the decline in the tech market instead of the UST collapse.

In its report, Chainalysis calls Bitcoin’s correlation with tech stocks “a relatively new development,” while Bitcoin maintains “significant price correlations” with the S&P 500 Index and NASDAQ-100 Technology Sector Index, free falling along with them.

However, there is no doubt that the downturn in BTC prices got worsened by the UST’s crash. However, the impact died with the end of UST’s collapse and BTC prices action again fell back in concert with non-crypto tech assets.

The collapse also led to saving stablecoins, as the trading volume during Terra’s collapse, between 9th May and 12th May, rose.

The blockchain analysis platform noted that all kinds of investors from big, institutional players to retail investors, sold their stablecoins during the crash.

UST Crash: What Happened?

Terraform Labs (TFL) announced on May 7, 2022, that it’s withdrawing $150 million from 3pool, a Curve liquidity pool.

Just as the withdrawal was made, two users attacked the pool taking advantage of less liquidity and swapped roughly around $185 million UST for USDC in just two hours.

TFL to rebalance it made the withdrawal of 100 million UST from 3pool, in its response.

These heavy trades caused UST to de-peg from its dollar resulting in a major sell-off in exchanges, hence making the peg go down further.

Why are #crypto prices plummeting? Did the UST-Luna situation cause this? What’s an algorithmic stablecoin?
Our experts break down the recent events in the market and share key takeaways. https://t.co/yojWjVnSRn
— Chainalysis (@chainalysis) June 9, 2022

Luna Foundation Guard (LFG), who oversees UST, tried to save the coin’s peg by selling its Bitcoin reserves worth billions to counter-buy UST from the market, on May 9. Alas, the foundation failed in its attempt to save the UST.

What Led To LUNA Collapse?

UST, an algorithmic stablecoin, was backed by smart contract-based algorithms for the uninitiated. A mint and burn mechanism between LUNA and UST was the algorithm that kept UST at its dollar peg.

With UST losing its peg, the artificial supply-demand ratio crashed, leading to a way for huge arbitrage opportunities.

Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing