1 Lesson to Learn from LUNA’s Implosion

by Alex Benfield
By Alex Benfield

There is no other way to cut it — panic has set into the market as the Terra (LUNA, Tech/Adoption Grade "D") and TerraUSD (UST) situation worsened overnight.

As you likely know, UST — previously the largest decentralized stablecoin — lost its peg to the U.S. dollar this week and dropped as low as 22 cents earlier today. LUNA, meanwhile, plummeted to under a dollar today. It was trading at a high near $117 just over a month ago.

This marks one of the worst implosions ever in the crypto market.

Where there was still hope on Monday from optimistic traders that LUNA and UST could recover, today, that seems to have evaporated. Investors are fleeing and cutting their losses from the two projects.

What is worse is that LUNA, UST and the Terra ecosystem were favorites amongst the crypto Venture Capital crowd. Many shops held large positions in these assets.

What happens when those large venture funds lose 90% on one trade? Some of them decide to liquidate other holdings to clear up some cash.

That appears to be the type of market action we're seeing today. More speculative crypto assets are falling by 10%, 20% and even 30% on the day.

This leads to a cycle of fear and panic, creating incredible selling pressure. But there is a silver lining to be found in our market leaders, Bitcoin (BTC, Tech/Adoption Grade "A-") and Ethereum (ETH, Tech/Adoption Grade "A").

While unable to cast off downside pressure entirely, BTC and ETH are down only 3% and 6%, respectively; impressive when compared to the losses smaller cap cryptos are seeing today.

And that brings me to the key lesson you should take away from this week: The current price action should reinforce the idea that in times of stress, it's a good idea to hold the market leaders like Bitcoin and Ethereum.

True, both are down roughly 55%-plus from their all-time highs. But it's likely we've seen the bulk of that sell-off. The fact that a market disruption like the LUNA/UST situation isn't even enough to push losses further speaks to that.

That doesn't mean either is done dropping. It just means we're approaching the bottom of this market … if we aren't already there.

If this isn't the bottom for BTC, the next support level is its July low of $28,800. As long as BTC remains above that level, a recovery bounce in the short term is a real possibility.

If BTC falls below it, there isn't much support above $20,000. Perhaps buyers will jump in around the round number of $25,000, but it would be tough to say definitively.

On the upside, Bitcoin will need to claw its way back above $35,000 to gain some breathing room.

Here's BTC in U.S. dollar terms via Coinbase (COIN):

 

Ethereum has been holding its level on the ETH/BTC ratio very well in the last few weeks, much to the surprise of Bitcoin maximalists, and confirming its position as a market leader.

ETH has been fighting to hold above $2,200 so far this week but it's having a tough time. If it falls below that point, the $2,000 level should offer some support. Beyond there, the $1,750 low from last July should provide major support as well.

If Ethereum is to form a bottom in the next few days, it'll need to climb its way back above $2,500 to hold off the bears.

Here's ETH in U.S. dollar terms via Coinbase:

 

What's Next

This week's perfect storm of fear and panic allowed bears to take full advantage. With the entire financial ecosystem worried about the Federal Reserve's rate hikes and higher-than-expected inflation numbers, the timing of the TerraUSD fiasco couldn't have been worse. Investors who were already panicked saw a project — one that was a top 10 crypto just a few days ago — implode in front of their very own eyes.

This isn't unique to crypto, by the way. Failures like this can happen in any sector of the traditional market. It happens. And when it does, our job is to analyze the situation to help you figure out the best way to move forward.

And if the past two years have taught us anything, it's that crypto adoption is only going to rise.

Nation states are legalizing Bitcoin as tender, institutions are deploying more capital to the space and the use cases for Ethereum and other smart-contract protocols continue to grow.

Crypto truly is here to stay; it isn't going to $0.

That means the bottom of this market could act as a generational buying opportunity with impressive profit potentials as the space continues to expand and grow.

So for now, I'll reiterate what I and my colleagues have been telling you for a while — don't trade on emotion. Trade on facts and detailed, credible analysis, the likes of which we will continue to provide.

As I mentioned earlier, our market leaders look ready to confirm a bottom soon. The bottom of a market cycle, known as the capitulation point, is often marked by peak fear, uncertainty and doubt (FUD). During capitulation, market sentiment shows that traders have lost all hope and think the market can only go lower. This is usually the point when everything turns around and the market recenters itself.

We might be heading toward capitulation very soon, so remember not to get caught up in the trap that is peak FUD. And do keep an eye on your inbox for further updates.

Best,

Alex

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