The Aftershocks of LUNA’s Collapse

By Marija Matic

The total crypto market capitalization fell to its $1 trillion support level a few days ago due to LUNA's collapse. It has since bounced slightly, and it may be headed toward the $1.4-1.5 trillion resistance area as the worst of the aftershocks seem to be dissipating for now.

Zooming in to focus on the market leader, Bitcoin's (BTC, Tech/Adoption Grade "A-") major support lies at $28,800, which is also last June's low. For four consecutive days, BTC's price tried to close below that key level, but the bulls wouldn't allow it as they fought hard to maintain support.

And what a fight it was!

Just as important as maintaining support is the fact that the market has managed to absorb 80,000 BTC sold by LUNA's market makers in an attempt to save the TerraUSD (UST) peg.

As such, you can see in the BTC/USDT four-hour TradingView chart that BTC's volatility has calmed down as it trades near $30,000:

However, there is speculation that LUNA's market makers didn't sell the BTC … rather whispers are that they used that BTC to provide exit liquidity to whales.

If that rumor turns out to be true, there are severe implications.

First, it means the market didn't absorb the 80,000 BTC, so that bullishness is erased. And, in this scenario, that means that BTC could still be dumped into the market and cause more downside pressure on the price of BTC.

Second, that would mean LUNA's market makers misused funds meant to save the peg to pay off big-foot investors and give them preferential prices for their LUNA … while retail investors were left with the crumbs.

Think of it like a board of directors using emergency funds to bail out executives rather than save the company.

So, how can we be sure one way or another what happened? Well, for now, we're waiting on proof from the Terra team that everything was above board. And the community is indeed pressing for proof.

I'll be following this story and any developments closely.

In addition to this, there are three further developments of interest coming from the LUNA fallout:

1. Decentralized insurance platforms are starting to pay out Tether (USDT) and other stablecoins to users who were insured with them against a UST de-peg.

Platforms like Risk Harbor, Unslashed, Unleashed and InsurAce are offering stablecoin insurance that gets triggered when the average price stays below a certain level (like 88 cents) for a certain period of time. Now, those companies will pay millions of dollars to insured UST holders to make them whole.

This comes as a good reminder to crypto users that they can insure large stablecoin holdings against de-pegs and other negative events like platform hacks.

2. Do Kwon has proposed to create a new LUNA token that would be airdropped to LUNA stakers, holders, residual UST holders and essential app developers.

This new token would be a forked version of current LUNA … but without the stablecoin mechanism and with different tokenomics. His narrative is that "LUNA is more than UST."

However, the community — including CZ, the founder of Binance — seems to be against this forking proposal and in favor of burning a hyperinflated supply of LUNA through increased transaction fees, instead. Hence, we're not sure if his proposal will pass during tomorrow's voting, so we'll have to wait and see on this one.

3. Other chains are benefiting from Terra's demise by snatching their talented developers and applications.

There are ongoing fights over Terra's many developers and apps that otherwise face an uncertain future. While Terra's founder, Do Kwon, urged developers to stay and signal support for Terra2.0 — promising them airdrops of new LUNA tokens as an incentive — ecosystems like Polygon (MATIC, Tech/Adoption Grade "B") are offering capital and resources to help them migrate swiftly to their network.

Notable News, Notes & Tweets

What's Next

After the historic week that has created a tsunami of fear, uncertainty and doubt (FUD) that reached Mt. Gox levels, the situation seems to be calming down as the market is counting its wounded and looking for remedies.

In less than a week, $40 billion of value from the LUNA/UST project has been wiped out, causing realized losses on an enormous scale.

The consequences from it will be felt for a long time, especially when it comes to yield farming and other stablecoins, which have seen their supplies contract by $7.5 billion. Again, all in just a week. These sectors in particular will need to earn back trust in a meaningful way.

But even while we're collectively licking our wounds, we can appreciate the lessons to be learned from such events ...

Lessons like ensuring your portfolio and crypto strategies are diversified to prevent fallout in one area from wiping you out.

Or like utilizing services such as decentralized insurance where applicable, an avenue I believe will become more popular, going forward.

Keep checking in with us here at Weiss Crypto Daily for these lessons and common safety strategies for navigating the crypto space — like the ones I outlined yesterday — and of course, timely and actionable market analysis.

Best,
Marija Matić