Monday Market Minute | May 9, 2022

Terra/Luna implodes — $40 billion wiped out in days as crypto's house of cards collapses

What Moved

The Terra/Luna ecosystem collapsed in spectacular fashion beginning May 9, erasing more than $40 billion in market value within days. UST, an algorithmic stablecoin pegged to the U.S. dollar through a complex relationship with the Luna token, broke its peg and entered a death spiral as holders rushed for the exits. The contagion spread immediately — Bitcoin fell below US$30,000, and the entire crypto market cap contracted by hundreds of billions. Three Arrows Capital, a major crypto hedge fund with heavy Luna exposure, began its unravelling.

Why It Matters

The Terra collapse was a watershed moment for Canadian exempt-market investors who had allocated to crypto funds and digital asset platforms. It exposed the fragility of yield-farming strategies and algorithmic mechanisms that had been marketed as innovation but were, in practice, leverage in disguise. The OSC and CSA faced renewed pressure to accelerate their regulatory framework for crypto trading platforms and digital asset funds.

Signal to Watch

Contagion to other crypto lending platforms — Celsius Network and BlockFi were both showing signs of stress that would become critical in the coming weeks.

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