Basically why is everyone freaking out in Crypto?
In: 7
Luna and UST linked. If you have UST you can basically convert 1 UST (destroying it) into $1 worth of Luna (creating as much as is necessary) and vice versa.
The point of this was to have UST be stable with respect to the US Dollar. If UST was ever worth more than a dollar, people would convert $1 worth of Luna into 1 UST then sell the UST for more than a dollar, making a profit. The selling of the UST would lower the price.
If UST was ever worth less than a dollar, people wouldn’t covert 1 UST into $1 worth of Luna, then sell it, making a profit. The purchasing of UST would raise the price.
But all of this hinges on Luna retaining value in and of itself. If Luna ever lost significant value, it would cause the whole thing to collapse. Why would it ever do that? Well, if the creators of the entire scheme enticed people to invest in it by promising 20% returns, that might artificially inflate the value of Luna as people storm in, buying it. But that’s not tenable and the whole thing crashed.
Luna, which was around $100 is now hovering at around 2 cents and UST, which is supposed to be “pegged” at $1 is now around 30 cents. Remember the fact that when UST was less than a dollar people were supposed to convert it into Luna and then sell their Luna? Well, with Luna being very very low, the sale of UST into Luna generated lots and lots of Luna, further lowering the price, and then people sold it off, lowering it even more. So now there are billions of worthless Luna out there. This is what is known as a deathspiral, which skeptics predicted pretty much from the get go. As of now, they turned off the blockchain, so you can no longer create or destroy UST or Luna.
The entire Crypto Scheme is all one big tangled web, with BitCoin involved somehow, resulting in its prices tanking, exchanges like Coinbase having it’s actual real-world stock taking a hit. Basically everything is rippling out, reducing confidence in Crypto in general and people are starting to pull out, which basically creates a negative feedback loop.
A lot of crypto businesses, including exchanges like Coinbase and “stablecoins” like UST, involve holding large amounts of other peoples’ money temporarily, like a bank. And just like a bank, they are sometimes allowed to invest some of that money.
We don’t know what they invest that money in, but it seems pretty likely that it’s some kind of crypto. That’s safe to do, as long as crypto keeps going up; but pretty much all crypto has lost value recently, so there’s concern that they may lose their reserves and go broke.
If UST loses their reserves, the currency will collapse and everyone left holding it will lose money. If Coinbase loses their reserves, some of their customers will never be able to withdraw the money they’ve deposited. And (unlike most real banks) the government will not step in to help those customers.
Because all crypto is digital currency with value that was created out of thin air. They only have value because people think they have value. “But u/holygig, that describes all currencies!” True. However, most currencies are backed by the national governments of countries with real assets and economies and they still sometimes fail. See: Venezuela
They are investments, very risky investments because again there is nothing tangible backing them at all. The first thing people do in a market crash is they dump their riskiest investments. That is what is happening to crypto right now. All of them are crashing. Hard.
I think everyone is talking about crypto the same way everyone is talking about QAnon. It’s a market full of grifters and people with sunken costs that want to pump up the hype. Blockchain is interesting from a software perspective, and could potentially do some good in a society with less greed, but crypto best be avoided imo. In practice it’s just a stock market with no real notion of underlying value and no consumer protections.
Latest Answers