Stablecoin Terra's broken dollar peg hits wider cryptocurrency markets

TerraUSD, the world's fourth-largest stablecoin, lost a third of its value on Tuesday, spooking cryptocurrency investors and partly contributing to bitcoin's tumble below $30,000 for the first time in 10 months.

Stablecoins are digital tokens pegged to the value of traditional assets, such as the U.S. dollar. They are popular as safe-havens in times of turmoil in crypto markets and are a common medium of exchange, often used by traders to move funds around and speculate on other cryptocurrencies.

TerraUSD, a so-called algorithmic stablecoin that is currently the fourth-largest by market capitalisation, on Tuesday broke its 1:1 peg to the dollar and fell as low as $0.67, according to price site Coingecko.

The token shot to prominence earlier this year when non-profit Luna Foundation Guard, an affiliate of Terraform Labs, the company behind TerraUSD, pledged to amass $10 billion worth of bitcoin to support its dollar peg.

Unlike other stablecoins that have reserves in traditional assets, TerraUSD maintains its peg through an algorithm that moderates supply and demand in a complex process involving the use of another balancing token, Luna.

Luna Foundation Guard said in a tweet on Monday that it would defend TerraUSD's dollar peg through $1.5 billion in loans to over-the-counter trading firms, half in bitcoin and half in TerraUSD.

Luna Foundation Guard and Terraform Labs could not be reached for comment.

Justin d'Anethan institutional, sales director at Amber Group, said the use of bitcoin as a reserve had created a vicious cycle for TerraUSD, with selloffs in both tokens driving the other lower.

"Bitcoin is going down as it's being sold to defend an ecosystem that is suffering, the ecosystem suffering is creating even more panic on (TerraUSD), which is weighing on the Luna token, which requires the foundation to use more reserves to supplement and defend the peg," he added.

"It's not a fun situation to be in."

Bitcoin fell past $30,000 for the first time since July 2021 on Tuesday morning, falling alongside other traditional "risk off" assets such as tech stocks, but also weighed by the TerraUSD selloff.

Analysts at Singapore's QCP Capital said in a note that while bitcoin was currently holding at a key support level, "there is material tail risk from the (TerraUSD) de-peg along with macro concerns."