The term “breaking the buck” is really bad in financial markets. It is generally in the midst of a panic or during a period of financial market discord and illiquidity. “Breaking the buck” actually pertains to money market funds not being able to offer positive returns whereby the value of a money market fund will not remain at $1.00. It is extremely rare and reserved for periods like the global financial crisis and the great recession.

In cryptocurrency, the so-called stablecoins apparently can “break the buck” just like money market funds. TerraUSD is supposed to be the third largest of the stablecoins that is meant to trade at the stated $1.00. While the $1.00 stablecoin pegs are generally backed by Treasuries or cash and other dollar-denominated debt, TerraUSD is considered an algorithmic stablecoin.

The price of TerraUSD fell more than 2.6 cents to 0.9705 on Monday. It has traded up as high as 1.040885 over the last year. Breaking the buck here is only adding to the drop in other cryptos (Bitcoin was back down to $30,832 and Ethereum was back down to $2,886 on last look — both down over 10% on the day alone).

Are stablecoins now in jeopardy, or is this just a problem for TerraUSD?

If its price is below the $1 threshold, then traders and holders can burn the coins and permanently remove that coin from circulation. This would then be in exchange for $1 worth of new units of the Luna cryptocurrency. And if TerraUSD plays out the way it is supposed to, it would act to reduce the supply of TerraUSD (and then raise its price). The flip side is that if TerraUSD rises above $1 (as it has) then the traders and holders can burn Luna to create new TerraUSD in a manner that would increase the stablecoin’s price to send it back down towards the $1 mark.

Breaking the Buck

TerraUSD (UST) is a stablecoin hosted by the Terra network and was launched by Terraform Labs in South Korea. While the TerraUSD is pegged, the algorithmic pegging means its reserves are not in fiat currency. Coinbase reports that the algorithm employs Terra’s governance token luna (LUNA.) Also according to Coinbase’s live data:

The TerraUSD price is $0.95, a change of -4.72% over the past 24 hours as of 3:05 p.m. The recent price action in TerraUSD left the token’s market capitalization at $17,680,964,259.44 USD.

An article from Coinbase in 2021 described algorithmic stablecoins as either a fool’s errand or simply a matter of time. As of today, the fool’s errand seems to be winning. Barron’s has now reported that TerraUSD is partly to blame for the plunge in crypto prices that has helped to punish Bitcoin and other key cryptocurrencies. Now look at how badly the move has hurt other crypto-related stocks:

• ProShares Bitcoin Strategy ETF (NYSEArca: BITO) was down 14.66% at $19.11 (after hitting new low of $18.87).
• Grayscale Bitcoin Trust (BTC) (GBTC) was down 15.47% at $21.15 (low of $20.55) and at a discount to its NAV.
• Silvergate Capital Corporation (NYSE: SI) was down $21.44 at $90.07 (52-week low of $80.78).
• MicroStrategy Incorporated (NASDAQ: MSTR) was down 26.4% at $216.45 (52-week low was $215.44).

Other blockchain related stocks:

• Marathon Digital Holdings, Inc. (NASDAQ: MARA) $11.98 (-$2.97; -19.83%)
• Riot Blockchain, Inc. (NASDAQ: RIOT) $7.61 (-$1.88; -19.81%)
• Coinbase Global, Inc. (NASDAQ: COIN) $83.24 (-$20.50; -19.76%)