Terra Luna crash: What are ‘stablecoins’ and how stable are they really?
The world of cryptocurrencies was sent into a spin with the collapse of stablecoin TerraUSD and its sister coin Luna, whose prices crashed earlier this month.
There’s nothing new about wild volatility in cryptocurrency prices. But investors were caught by surprise by the sudden drop in TerraUSD’s price, because it is a so-called stablecoin.
As the name suggests, the raison d'être of stablecoins is to remain stable, as they are supposed to be pegged to fiat currency, such as the dollar or the euro.
TerraUSD has been pegged almost exactly to the dollar since its release, but on May 9 it crashed, and it is now worth just over $0.11 (€0.10).
Its sister coin Luna was worth more than $80 (€76) a coin at the start of May, and as of 18 May it was worth a fraction of a cent.
The crash of these two coins has been compared to a mini 2008 financial crisis within the crypto eco-system, with their collapse having a knock-on effect on other digital coins and projects, wiping billions of dollars off the market.
This begs the question: are stablecoins actually stable?
Stablecoins are cryptocurrencies that are usually pegged to a fiat currency, such as the dollar.
The most high profile stablecoin is Tether, of which there is around $75 billion (€71.22 billion) in circulation. This makes it the third biggest cryptocurrency behind Bitcoin and Ethereum.
Tether is pegged to the dollar, meaning its value is supposed to remain stable at $1.
This provides cryptocurrency investors with a way to exchange cryptocurrencies, such as Bitcoin and Ethereum, on exchanges, without converting the money to regulated fiat currency.
Investors can also exchange their more volatile cryptocurrencies for Tether to keep the dollar value at that time, because the price is
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