With many investors pondering the direction of ETH and BTC this week, it has been LUNA which has been getting the crypto enthusiasts excited. Traders long LUNA were expanding their positions Wednesday as LUNA broke the price record it first established back in December.
The coin managed to put on 25% yesterday and was trading at more than double its price since its 2022 low of $44. This is doing wonders for its market cap, of course, and puts it firmly in the top 10 coins right now. Some analysts say this week’s trading activity is starting to look like a coming of age party for LUNA.
What has been driving the price of LUNA?
But what has been driving the price all of a sudden? Unlike everything else, it does not look like Ukraine. LUNA’s sister token is TerraUSD (aka UST) which is an algorithmic stable coin pegged to the USD. The stable coin keeps its dollar peg via a conversion formula allowing owners to cover UST into LUNA if UST falls in price versus the dollar.
If UST does well and starts trading at over a buck, LUNA owners can burn their LUNA coins to create additional UST. As far as UST is concerned, this is all about keeping the dollar peg stable. As far as LUNA is concerned, Terra will burn it to keep that peg.
What is also happening is that there is a demand for UST because of a surge of money into Terra’s Anchor Protocol, which is a yield bearing DeFi platform. Anchor pays around 19% for UST locked up in the protocol. The problem here is that the Luna Foundation Guard is currently minting the maximum amount of UST to keep up with the demand.
“As a result, people have turned to the Curve pool to get their UST, which has caused the Curve pool to become unbalanced,” the Lunar Foundation Guard said in a tweet 5 March. This refers to the Curve decentralised exchange. The LFG has said it is burning millions of LUNA to prop up the UST liquidity in the system. Less LUNA means a higher price for remaining coins.
Terra co-founder Do Kwon has said that Luna Foundation Guard is also beefing up its reserves to $1.5bn. They can be used to buy LUNA to convert into UST. That will drive the price higher still.
Are we looking at a market squeeze for LUNA?-
What we have here is a very attractive yield-bearing play which has been identified by cryptocurrency investors. Like with a central bank, Terra is having to move to support this; unlike a central bank, it can’t print money, although it is working its way around that issue in other ways. Terra has been able to capture around a trillion bucks’ worth of the decentralised stable coin market through its activity within TerraUSD. The total supply of UST tokens broke 1.4bn yesterday, which is its highest level to date, according to Smart Stake data.
To be able to do this, of course, Terra has been burning through LUNA coins like it has been going out of fashion, with over 120m taken off the table permanently. The total value currently locked inside the Terra ecosystem is now estimated at around the $25bn mark. It is now the highest staked asset among all cryptocurrencies on a 24 hour time frame. Over $35m of LUNA tokens are thought to be locked across multiple platforms.
It seems to us as if this environment is creating an artificial squeeze on LUNA. Technical analysts worry that LUNA could be losing some momentum, setting up some downside over the weekend. This is partly based on dropping volumes. But those volumes could also be less of an indication that fewer people are buying LUNA, and simply that there is less LUNA to buy, certainly the way Terra is brining through it.