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Over the last few weeks, the cryptocurrency market has continued to show signs of a correction as the entire market is undergoing a sharp decline in the Bitcoin price.
The reason for the price decline are as follow:
- Hypotheses arise from Berkshire Hathaway Vice Chairman Charlie Munger's mention of the Bitcoin bubble theory, Hengda, a Chinese real estate company, declaring a de facto default (default), and the SEC (US Securities and Exchange Commission) rejecting the Bitcoin spot ETF.
- Due to the hawkish atmosphere of the Fed (tapering) and the economic recovery with increased uncertainty due to the Omnicron variant.
Perhaps a combination of the various reasons mentioned above acted as a trigger for Bitcoin's price decline.
Bitcoin, which was sideways around 57k, showed a sharp decline, fell to the low 40k, rebounded, and is currently flat around 50k.
While the price of Bitcoin was rapidly adjusted, most cryptocurrencies, including Ethereum, also showed a sharp price decline and moved in conjunction with the price of Bitcoin.
However, in a market that continues to have corrections after such a significant drop, TERRA's LUNA price declined to $50, only to immediately rebound to near $80, and is trading at over $80 as of this writing.
Contrary to the overall cryptocurrency market movement in the past week, LUNA is probably the only cryptocurrency with a significant increase.
Due to this significant move, LUNA has risen from 13th to 10th place on CoinMarketCap (https://coinmarketcap.com) based on market cap.
Why was the price of LUNA able to rise even when all cryptocurrencies fell sharply?
First of all, to explain LUNA, it is necessary to understand the Terra protocol and its ecosystem, which is the basis of LUNA.
Terra Protocol is a project that operates numerous stablecoins within the protocol, including UST (24th in market cap based on Coin Market Cap). This is the same area as stablecoins that can be traded with other cryptocurrencies such as USDT and USDC as we know them. However, in contrast to the stable maintenance of $1, which attracts and issues real dollars equivalent to the issuance of other stablecoins, Terra StableCoin is linked with the vital coin, LUNA, and the distribution and incineration of LUNA to save $1.
The stability of the Terra Stablecoin is pegged firmly to $1 despite the significant volatility this year. The reliability of the project and the operation method of the Terra Stablecoin are also proven to be effective. As a result, the UST (dollar pegging) has surpassed 8billion (USD) in total issuance and is growing rapidly.
What does issuing UST have to do with LUNA's price?
As mentioned above, the issuance and burning of LUNA keep the Terra stablecoin stable at $1. Simply put, to issue 1 USD of Terra stablecoin UST, LUNA equivalent to 1 USD has to be burned. As the issuance of UST increases, the circulation of LUNA in the market decreases. As a result, the value of LUNA increases.
By understanding this simple operating principle, let's find out the what causes the price to increase
- Recently, Terraform Labs (TFL), the operator of the Terra blockchain, has decided to issue UST worth about $4.5 billion to launch a new project, Ozon_ defi insurance protocol. LUNA burned as much as the amount of UST issuance sharply increased, which impacted the value of LUNA.
- The Terra blockchain is a massive platform acting like an Earth or the universe. In Terra blockchain, many agents are working for their benefit, but in the end, all results will have an impact (predominantly positive) on the platform. Numerous cryptocurrency projects are being developed and participated in Terra-based within Terra Protocol, and the key currency of these projects is UST and other Terra Protocol stablecoins. In other words, as the number of players participating in the ecosystem increases, the issuance of Terra stablecoins increases, which means more LUNA will be burned. More than one hundred projects have already been launched or are in the preparing stage, which will act as a factor in steadily increasing the value of LUNA.
- The Terra blockchain will be upgraded to Columbus-6 from the existing Columbus-5 (Tera platform) in the second half of this year. Their compatibility with other platform blockchains (Ether, Solana, BNB, Polkadot, etc.) will also improve. Funds from other platform chains are flowing into Terra for attractive DeFi (decentralized finance) products within the Terra blockchain, which is expected to accelerate in the future. As mentioned earlier, funds from other chains come into Terra and are converted into stablecoins (UST) within Terra Chain. This will also lead to the incineration of LUNA.
- Cryptocurrency analyst Ran Neuner with 500,000 followers, predicts LUNA will rise to 5th by market cap for the following reasons:
For the reasons mentioned above and combined with other factors, LUNA prices have been steadily rising despite being largely unaffected by market conditions.
In the future, in predicting the price of LUNA, 1) How active will the ecosystem be? 2) Will the flow of funds from other platform chains increase steadily? 3) Conclusion: Is UST's issuance steady and the issuance increasing? It will be a meaningful LUNA analysis method if we watch as the standard.
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