Jump Crypto and Three Arrows Capital bought $1 billion worth of LUNA tokens recently.
LUNA’s price rallied nearly 18% this week to over $58, more than Bitcoin (BTC), whose returns in the same period came out to be a little over 1.5%. Similarly, the Terra token did better than its rival Ether (ETH), which is up around 4% this week.
Top ten assets and their performances across multiple timeframes. Source: Messari
Over the weekend, Bitcoin fell below its psychological support level of $40,000 as fears of a possible Russian invasion of Ukraine dampened risk-on sentiment. It continued declining on Monday after Russian President Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine and ordered troops there.
Data provided by CryptoQuant showed that the correlation between Bitcoin and the U.S. stocks reached an all-time high on Feb. 23, suggesting BTC had not been acting as a safe haven in the current geopolitical conflict.
#Bitcoin and US stocks are highly correlated lately. It hits the all-time high today.
Good News: $BTC is getting adopted by traditional institutions. Its ownership is changing by new players who trade stocks.
— Ki Young Ju 주기영 (@ki_young_ju) February 23, 2022
Other cryptocurrencies also fell due to the Ukrainian crisis, with Ether falling by as much as 9.5% and XRP by 16.5% from their weekly WTD high of $2,760 and $0.80, respectively.
VCs buy $1B worth LUNA
LUNA’s rebound move picked momentum after the Luna Foundation Guard (LFG), a nonprofit organization supporting the Terra blockchain ecosystem, announced Tuesday that it had raised $1 billion through the sale of LUNA tokens. buyers included Three Arrows Capital — a venture capital firm led by Ethereum-skeptic Su Zhu — and Jump Crypto, a trading group that earlier assisted Solana’s cross bridge platform Wormhole in replenishing their stolen $300 million.
1/ The long awaited [REDACTED] 3 is here!
— Terra (UST) Powered by LUNA (@terra_money) February 22, 2022
DeFiance Capital, Republic Capital, GSR, Tribe Capital, and many others also contributed to the LUNA buying round.
LFG revealed that it would use the proceeds to build a UST Forex Reserve denominated in Bitcoin. In detail, UST (or TerraUSD) is an “algorithmic stablecoin” backed by LUNA reserves, such that when one mint a UST, they must burn LUNA to keep the stablecoin’s peg to the U.S. dollar intact.
UST economic structure explained. Source: Murray Rudd
The new reserves intend to keep UST stable especially during extreme market volatility, wherein LUNA prices might move erratically and disturb the stability it intends to offer to the UST token holders.
“The UST Forex Reserve provides an additional avenue to maintain the stability of the peg in contractionary cycles that reduces the reflexivity of the system,” said LFG in a press release published Tuesday, adding that it could include other “major non-correlated assets” to the reserve in the future.
Jump Crypto, Three Arrows, and other buyers won’t be able to sell their LUNA holdings in an open market for at least four years.
Terra market outlook
Last year, LUNA witnessed incredible price growth due to a boom in UST adoption. Data compiled by Messari showed that the Terra token rose 14,000% in terms of market capitalization while, at the same time, the supply of UST tokens surpassed $10 billion.
UST supply vs. LUNA price. Source: Messari, Terra Analytics
The strong correlation between LUNA’s price and UST’s growth emerged after the implementation of the Columbus-5 upgrade. The technical tweak decreased LUNA’s liquid supply through increased burning and staking and increased the UST supply by expanding its cross-chain prevalence.
At the end of 2021, the Terra network had burned about 89 million LUNA tokens (worth $5.32 billion at current exchange rates) while improving value capture based on the UST’s growth.
“Economically, increases in UST demand simultaneously result in the expansion of the LUNA demand curve and contraction of the LUNA supply curve,” noted Will Comyns, a researcher at Messari, adding that increased UST demand would have a “great impact” on the LUNA supply and price. Excerpts:
“If UST adoption continues to grow over time, it is possible that LUNA supply will become essentially fixed at some low level in the future. Burning 100% of seigniorage will dramatically accelerate the reduction of total LUNA supply over time.”
Murray Rudd, an independent market analyst-cum-economist, noted that LUNA burning in conjugation with UST’s demand growth would boost its price to over $200 by the end of 2022 and $920 a year after that.
12/ Now the main event – price projections (‘ci’=90% confidence intervals):
31 Dec 2022 ($29.3-b UST market cap): $203 ($160-$278 ci);
31 Dec 2023 ($70.8-b UST market cap): $920 ($732-$1,195 ci); and
31 Dec 2024 ($154.8-b UST market cap): $7,575 ($4,441-$14,360 ci). pic.twitter.com/U4w0PSBu0M
— Murray Rudd (@crypto_rudd) February 22, 2022
However, one of the flip sides of the bullish outlook is the long-term positive correlation between Terra and Bitcoin.
Specifically, the correlation coefficient between the two assets was 40 points below zero on weekly timeframes this Wednesday.
LUNA/USD weekly price chart featuring its correlation coefficient with BTC/USD. Source: TradingView
Nonetheless, the metric remained positive through most of Terra’s history, suggesting that LUNA should continue mirroring the broader cryptocurrency market on lower timeframes.
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