The cryptocurrency TerraUSD had one job: Maintain its value at $1 per coin.
Since it launched in 2020, it had mostly done that, rarely straying more than a fraction of a penny from its intended price. That made it an island of stability, a place where traders and investors could stash their funds in between forays into the otherwise frenzied crypto market.
This week TerraUSD became part of the frenzy too, slumping by more than a third on Monday and then tumbling as low as 23 cents on Wednesday.
The collapse saddled investors with billions of dollars in losses. It ricocheted back into other cryptocurrencies, helping drive down the price of bitcoin. Another stablecoin, tether, edged down to as low as 96 cents on Thursday before regaining its peg to the dollar. The stock price of the largest U.S. crypto exchange,
has fallen more than 75% this year. It said on Tuesday that it was losing users and trading volume.
The crypto market has matured in recent years, running as a parallel financial system with its own version of banks and lending. These features attracted greater Wall Street engagement and venture investment, filling the coffers of crypto startups with cash. Crypto companies spent some of that cash on ad campaigns and lobbyists that painted the picture of an evolved market.
Yet TerraUSD’s plunge raises urgent questions about crypto developers’ ambitions to build a new form of finance. It shows that despite the hype, the nascent crypto system is still prone to the kinds of destabilizing bank runs that happen in the nondigital world.
TerraUSD’s outspoken creator,
directed that huge sums of money be spent to try to rescue his project. On
he tried to rally his followers.
“Terra’s return to form will be a sight to behold,” he wrote shortly after 6 a.m. Eastern time on Wednesday, when his stablecoin was trading at half its intended value. “We’re here to stay. And we’re gonna keep making noise.”
Stablecoins are a pillar of crypto’s parallel financial system. Crypto enthusiasts need to maintain a link to the government-backed currencies of traditional finance, where rent is due, cars are bought and bills are paid. But they want to trade and invest in cryptoland only, not in dollars or euros or pounds. So stablecoins act as a kind of reserve currency, an asset whose value everyone understands—and that shouldn’t change.
Professional traders and individual investors alike use stablecoins, and had stashed around $180 billion in them as of Tuesday. A trader might sell a bitcoin for TerraUSD, then use the TerraUSD to buy ether, another cryptocurrency, without ever touching a dollar or a bank account.
Crypto companies have sought to…