The fast-falling Terra (LUNA-USD) ecosystem is the talk of the crypto market today — and for good reason. As LUNA and TerraUSD (UST-USD) prices have fallen over 90% and 70% respectively, investors have flooded from the network in favor of other stablecoins. The heavy influence of Terra’s decline on other projects has been an inadvertent effect of the event, however. Avalanche (AVAX-USD) in particular is suffering at the hands of the news, due to the AVAX crypto’s relationship to the Luna Foundation Guard (LFG).
Avalanche isn’t really a companion to Terra. It’s actually more of a competitor. Avalanche is a layer-1 dapp network which, like Terra, seeks to be one of the defining platforms for decentralized exchange (DEX) trading and DeFi income-generating opportunities like staking and liquidity farming. The two networks are similar in size and, along with Solana (SOL-USD), make up a group of layer-1 protocols that blew up in popularity last autumn.
Here’s what investors should know about AVAX in light of recent news.
AVAX Crypto Tanks Due to Luna Foundation Guard’s Deep Avalanche Holdings
Why is the AVAX crypto down today? The two networks are competitors, so AVAX should theoretically be up on the news as users look for new options. But that’s not actually the case, for one reason: Terra developers happen to be huge AVAX whales.
The UST stablecoin lost its $1 peg once earlier this year, after drama with a DeFi platform drove users to leave the network. Around this point, the Luna Foundation Guard (LFG) — which oversees Terra’s development — began a $10 billion Bitcoin (BTC-USD) buying spree. This stock of Bitcoin acts as a reserve for the UST stablecoin. Upon the announcement of the reserve, LUNA prices reached an all-time high.
In April, the LFG then continued to build up a reserve of assets by buying $100 million in AVAX. This is the crux of Avalanche’s troubles today. As Terra continues to plummet, the LFG is spending $750 million of its BTC to stabilize UST. That has investors fearing it will also dump its massive bag of AVAX crypto, sending prices tanking.
Ironically, fear itself has lead to a massive price drop for the coin; AVAX is losing 34% in the wake of the event. The network’s market capitalization is also falling, to the tune of more than 30% as of this writing.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.