Historical replay · BTC/USD
The Terra/Luna Contagion (May 2022)
The algorithmic stablecoin UST de-pegging between May 9-12, 2022 triggered a wave of selling across the entire crypto market, dragging Bitcoin into a steady, sustained decline as well.
TerraUSD (UST) was an "algorithmic stablecoin": instead of being backed by real dollar reserves, it maintained its $1 peg through a mint-and-burn mechanism tied to its sister token, LUNA. In theory, if UST fell below $1, the system incentivized arbitrageurs to burn UST to mint discounted LUNA, pushing the price back into balance.
On May 9, 2022, UST lost its peg more sharply than usual, and instead of stabilizing the situation, the rebalancing mechanism began minting enormous quantities of new LUNA tokens to absorb the UST selling. The result was a hyperinflationary spiral: LUNA's supply literally exploded from hundreds of millions to quadrillions of tokens within days, and its price collapsed from several dollars to essentially zero.
The value destruction — tens of billions of dollars wiped out in under a week — triggered a wave of "risk-off" selling across the entire crypto market, as funds and exchanges with direct exposure to Terra were forced to liquidate other positions to cover losses. Bitcoin fell from around $34,000 to below $27,000 over the following days — not because of a problem with Bitcoin itself, but from the confidence contagion that followed across the industry.