Bitcoin has been on a steady decline since the beginning of 2022 despite reaching an all-time-high price of $64,000 in November. Many crypto enthusiasts were touting the number one cryptocurrency to hit $100,000 by Q1 of this year but in reality, the reverse has been the case.
While the crypto industry has attracted a lot of investments from institutional clients and approvals of several exchange-traded funds (ETF) by the United States SEC, all of these haven’t brought the growth we thought we would witness price-wise, instead, it has brought with it manipulations and direct correlation with other financial markets like the stock exchange for example.
May Bitcoin crash
The May Bitcoin crash has taken us unawares with the rising rate of inflation globally, Bitcoin was thought of as a reserve currency that would rise to the occasion in times like this. That entirely hasn’t been the case for Bitcoin despite Countries adopting the number one cryptocurrency as a legal tender. Countries like El Salvador and the Central African Republic have officially adopted Bitcoin as a legal tender despite warnings from the International Monetary Fund (IMF).
Luna Foundation Guard the issuer of the Terra USD stablecoin(UST) has been buying Bitcoin to shore up their reserves, and a number of the Bitcoin pumps experienced in the first quarter of 2022 have been due to this. Luna bought every Bitcoin dip before the May Bitcoin crash. Although, present fear in the market that has led to this crash is partly due to them. Let’s find out why…
Luna Foundation Guard and the May Bitcoin crash
In theory, a stablecoin is supposed to be backed by bank deposits in a bank account. For instance, let’s say if QryptoCentral is issuing a US Dollar backed stablecoin with a 100,000,000 supply at a 1:1 ratio we have to open a bank account and deposit $100,000,000. This would mean every stablecoin issued is completely backed with actual FIAT or paper money.
Although, Luna Foundation tried something innovative by introducing an algorithmic stablecoin that would not be backed by actual bank deposits but digital assets. Unfortunately, this means if the underlying value of the digital asset used to back the stablecoin drops the UST peg will also drop.
Originally a stablecoin is supposed to maintain at least a 0.99 ratio to the currency it’s pegged to but in rare cases like the case of UST, it dropped to $0.7155. Luna Foundation has been plagued with some internal squabbles associated with rising inflation and a wider crypto market crash which has contributed to the dumping of the Luna cryptocurrency. These underlying factors have also made UST dump despite being a stablecoin.
Is Luna Foundation Guard dumping Bitcoin?
The Luna Foundation Guard (LFG) has been the diamond hands of the crypto market until now, accumulating over $3.5 billion in Bitcoin to back its stablecoin edging closer to its goal of acquiring $10 billion Bitcoin for the reserves. While the idea to have an algorithmic stablecoin attempting to observe the Bitcoin standard is innovative it comes with a host of problems mainly due to volatility in the price of BTC and market manipulation.
Luna Foundation Guard has deployed $1.5 billion worth of capital to help protect Terra USD (UST) peg to the U.S. Dollar due to the May Bitcoin crash and the overall crypto market pullback this week. It’s important to note that this $1.5 billion worth of capital is in Bitcoin. Does this mean LFG will be selling some of its Bitcoin reserves?
In a series of tweets, the Luna Foundation Guard explained that its council voted to defend the stability of the $UST peg and broader Terra economy due to the market volatility over the past few days. While it’s not entirely clear if LFG will be exiting some of its Bitcoin position the firm moved 42,530 BTC yesterday, May 9 at around 6:34 PM from its reserve wallet that has been accumulating BTC for months.
Do Kwon, founder of Terraform Labs has explained that LFG is not trying to sell some of its Bitcoin holdings but deploying more capital to strengthen the UST peg and increase the total size of their reserves long term.
1/ The LFG Council just voted to deploy 1.5B in capital (0.75B in BTC, 0.75B in UST) to allay market concerns around UST. Some more context on why and how: https://t.co/TfaAPkzgUJ
— Do Kwon 🌕 (@stablekwon) May 9, 2022
Cryptocurrency traders and speculators have capitalized on these LFG Bitcoin movements by driving extreme fear into the market and projecting further price pullback of Bitcoin and other cryptocurrencies. The Bitcoin fear and greed index is currently at 11, signaling extreme fear.
Bitcoin Fear and Greed Index is 11 – Extreme Fear
Current price: $31,097 pic.twitter.com/3C8GxnNc2A
— Bitcoin Fear and Greed Index (@BitcoinFear) May 9, 2022