Lyn Alden: Terra’s BTC Buys Could Trigger Crypto Capitulation Event
According to macro strategist Lyn Alden Terra’s recent series of Bitcoin (BTC) buys could trigger a capitulation event for the leading digital asset and the wider crypto market.
For the past couple of months, Luna Foundation Guard (LFG), the non-profit organization built to support Terra, has been accumulating around $1.6 billion worth BTC.
Terra’s Bitcoin accumulation is designed to back Terra’s native dollar-pegged stablecoin TerraUSD (UST), according to Terra Founder Do Kwon.
Alden, however, pointed out that a sharp decline in LUNA’s valuation might force the LFG to sell its BTC reserves in order to keep UST stable.
“If Luna has a similar price decline to Fantom (FTM) or some of these other hard-hit cryptos, the UST peg would be at risk. If the UST peg becomes at risk, the LFG would be selling Bitcoin reserves into an already soft market. That type of event could mark a cycle capitulation.”
If Luna has a similar price decline to Fantom or some of these other hard-hit cryptos, the UST peg would be at risk.
If the UST peg becomes at risk, the LFG would be selling bitcoin reserves into an already soft market. That type of event could mark a cycle capitulation. pic.twitter.com/lUhr0AC7g8
The macro strategist also highlights another risk where bear market could push UST holders to convert the stablecoin into LUNA or BTC in order to cash out.
“Unlike a crypto-collateralized stablecoin, there is no specific threshold where UST breaks. However, if LUNA gets small relative to UST, the probability of an algorithmic bank run increases… Many of them would liquidate their BTC for cash since their positioning at the time was meant to be a stablecoin.”
According to Alden, there is yet another risk which involves the Anchor Protocol (ANC) – a savings and lending borrowing platform built on the Terra blockchain, which offers users annual percentage yield (APY) as high 19.5%.
The analyst points out that Anchor Protocol’s high APY is complicated as it feeds into both creating demand for UST and setting a ticking time bomb that could go off.
“Then there’s the unsustainable Anchor yield time bomb. The time bomb is not about how well-managed the yield decline will be. It’s about what happens to UST demand structurally, when the primary demand driver (artificially high Anchor yields) no longer exists.”
