The ‘evil genius plot’ behind Terra Luna’s crash and cryptocurrency bloodbath

The cryptocurrency market has had billions in value wiped off it after an epic fail and now the accusations are flying that something sinister went down.

People have had their savings wiped out by the cryptocurrency bloodbath and homes are under threat as an eye-watering $US200 billion ($291 billion) was slashed from the crypto market in just 24 hours.

The mayhem in the cryptocurrency world was the result of a massive sell-off, as spooked investors raced to offload their assets — but nobody knows what caused two of the industry’s biggest players’ to crash.

Bitcoin has plunged from a high of $US69,000 to below $US25,500 this week but it wasn’t the world’s best known crypto that caused the massive shockwaves throughout the sector.

Instead it was the crash of the terra (UST) and its sister token luna.

Terra is known as a “stablecoin” – cryptocurrencies that are “pegged” against the US dollar or other traditional assets, which in theory protected them from market bloodbaths.

This means that an investor should be able to sell a token at any point, and get $US1 in return.

The idea behind that arrangement is that if terra fell below $US1, it could be swapped for luna, which was supposed to ensure stability – but this week, both crashed simultaneously, with luna collapsing by a devastating 98 per cent.

Terra, which was one of the world’s most valuable stablecoins, saw its value plummet below $US0.20.

The extreme sell off was the equivalent of panicked people running to the banks and pulling out all their money.

Luna’s crash at the same time as terra has been described by experts as a “death spiral”, as it went from about $US86 at the start of this week before plunging to a mind-boggling $US0.003 on Friday.

The essential collapse of luna, which saw its market value spiral from $US40 billion to about $US500 million, had a knock on effect on the broader cryptocurrency market with the price of bitcoin falling to its lowest level since December 2020 and ethereum also falling by 16 per cent.

‘Exploitative trade’

Social media has gone into overdrive – pointing the finger at big US hedge funds and trading firms for causing the collapse owing to the billions involved in trades that went down.

Some of the leading US investment firms including BlackRock and Citadel Securities have been quick to deny any involvement.

Yet, Lisa Wade, the CEO of blockchain company DigitalX, said while it was too early to say if the momentum for the crash was created by collusion, it appeared “exploitative”.

“Conspiracy theorists would say ‘yes’, because it’s a massive trade. I mean, in all of my career, it’s one of the biggest trades that I’ve seen,” she told the ABC.

“It’s almost like an evil genius plot, because there are a lot of steps to it.”

She described the plot as complex — it involved purchasing $US1 billion worth of terra, betting on the price of bitcoin falling in a move called “shorting”, as well as looking at timing it when fewer eyes were on the market.

Saturday night was their target as it was when trading volumes were low, she explained.

In basic terms, it saw terra being sold off in massive volumes which then triggered a feeding frenzy of more sell-offs that broke the stablecoin system and also rolled into other cryptos with the likes of bitcoin also being offloaded.

“Luna was impacted because it’s the underlying [backer] of the UST. So every time a UST [token] is bought, a luna [token] is burnt, which means there’s less tokens in supply, so the luna price goes up,” she said.

But the reverse applies when people start selling and essentially a huge amount of luna flooded the market driving the price down, she added.

“And if there’s no buyers and the price goes down, then it starts to feed on itself, because people start panicking and selling Luna,” she said.

“This was an exploitative trade that took advantage of the fact that markets are weaker. The perfect storm was nobody stepping up to buy the bitcoin and the UST.”

The human fallout

Heartbreaking stories have been shared on the TerraLuna Reddit page with moderators pinning a list of suicide prevention hotlines from around the world to the top of the page.

“I lost over 450k usd, I cannot pay the bank. I will lose my home soon. I’ll become homeless,” wrote one person on the forum.

Another spoke about losing all their life savings after buying Luna for $US85, while others said they had lost $US50,000 in one night.

“I should’ve cashed out when it was $100, then I would have been up $25,000,” one user said.

“But I got greedy hoping to get more money so I can at least afford a down payment for a house for my family. I guess no house and savings then.”

Terra and luna’s creator, South Korean Do Kwon, described the crash as an “attack”.

“I’ve spent the last few days on the phone calling terra community members – builders, community members, employees, friends and family, that have been devastated by UST depegging,” he tweeted on Saturday.

“I am heartbroken about the pain my invention has brought on all of you.”

Ms Wade added it was upsetting that mum-and-dad investors who had used their savings to back the stablecoins which were offering a 20 per cent return, had been caught up in the collapse.

“So lots of innocent people had their money saved up in their thinking they were getting risk-free deposits,” she said.

What’s next?

Terra’s recovery seems unlikely with its backers finding little momentum to raise $US1.5 billion to boost its value and restore it to parity with the US dollar.

Mr Kwon seemed to suggest on Saturday that it was game over for the way the stablecoin used to operate.

“I still believe that decentralised economies deserve decentralised money – but it is clear that $UST in its current form will not be that money,” he tweeted.

“Neither I nor any institutions that I am affiliated with profited in any way from this incident. I sold no luna nor UST during the crisis.”

He added there were “multiple proposals” on the next best steps.

“What we should look to preserve now is the community and developers that make terra’s blockspace valuable – I’m sure our community will form consensus around the best path forward for itself, and find a way to rise again,” he said.

Originally published as The ‘evil genius plot’ behind the cryptocurrency market crash

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