LUNA performed better than its leading crypto peers as it was able to withstand the negative market impact of the ongoing Ukraine-Russia conflict.
LUNA’s price is up almost 18% this week to more than $58, ahead of Bitcoin, which is down just over 1.5% over the same period. Similarly, LUNA outperformed rival ETH, up around 4% this week.
Top ten assets and performance across multiple time periods | Source: Messari
Over the weekend, Bitcoin fell below the $40,000 psychological support as concerns over a possible Russian invasion of Ukraine limited risk appetite. It fell further on Monday after Russian President Vladimir Putin recognized two self-proclaimed breakaway republics in eastern Ukraine and ordered troops there.
According to data from CryptoQuant, the correlation between Bitcoin and US stocks hit an all-time high on Feb. 27. shows BTC is not a safe haven in the current geopolitical conflict.
BTC-S&P500 correlation | Source: CryptoQuant
Other cryptocurrencies also fell on the Ukraine crisis, with ETH down as much as 9.5% and XRP down 16.5% from weekly WTD highs of $2,760 and $0.8, respectively.
VC buys $1 billion LUNA
LUNA’s recovery move is gaining momentum after the Luna Foundation Guard (LFG), a non-profit organization that supports the Terra blockchain ecosystem, notification on Tuesday that it raised $1 billion from a LUNA token sale. Three Arrows Capital — the venture capital firm led by Ethereum skeptic Su Zhu and Jump Crypto — the trading team previously helped Solana Wormhole’s cross-chain bridge platform replenish the $300 million hit. Your thieves are typical buyers.
In addition, DeFiance Capital, Republic Capital, GSR, Tribe Capital and many others also contributed to the LUNA buy round.
LFG announced that it will use the proceeds to build a UST forex reserve denominated in Bitcoin. Specifically, UST is an “algorithmic stablecoin” backed by the LUNA reserve. So if one mints UST, they have to burn LUNA to keep the stablecoin’s anchor price on the US Dollar.
Economic structure of the UST | Source: Murray Rudd
The new reserves are intended to keep UST stable, especially during periods of high market volatility, which can cause LUNA’s price to fluctuate wildly and disrupt the stability it is designed to provide to UST token holders.
“UST Forex Reserve provides another way to maintain peg stability during contraction cycles that reduce system responsiveness,” LFG said in a statement. Notice press release on Tuesday, adding that it could add “other large uncorrelated assets” to its reserves in the future.
Jump Crypto, Three Arrows and other buyers will not be able to sell their LUNA on the open market for at least 4 years.
Market outlook from LUNA
Last year, LUNA’s price increased dramatically due to the explosion of UST adoption. Data compiled by Messari shows that the token’s market cap has increased by 14,000%, while at the same time the UST token supply has surpassed $10 billion.
UST offer vs. LUNA price | Source: Messari, Terra Analytics
The strong correlation between the price of LUNA and the growth rate of UST arose after the implementation of the Columbus 5 upgrade. This technical adjustment reduced LUNA’s liquidity supply through increased burning and staking, and increased the supply of UST through expanding its cross-chain popularity.
By the end of 2021, the Terra Network has burned approximately 89 million LUNA tokens (worth $5.32 billion at current exchange rates) while improving value capture based on UST growth.
“In economic terms, an increase in demand for USTs leads to an expansion of the LUNA demand curve and a contraction of the LUNA supply curve,” said Will Comyns, a researcher at Messari. calledadding that an increase in UST demand will “affect” LUNA’s price and supply:
“If the UST adoption rate continues to increase over time, it is possible that the supply of LUNA will essentially stabilize at low levels going forward. Burning 100% of the coin issuance revenue will significantly accelerate the decline in the total supply of LUNA over time.”
Murray Rudd, economist and independent market analyst, Note that The burning of LUNA combined with demand growth in UST will increase its price to over $200 by the end of 2022 and to $920 a year later.
Source: Murray Rudd
On the other hand, one of the downsides of the bullish outlook is the long-term positive correlation between LUNA and Bitcoin. On February 23, the index fell to -0.4 on the weekly time frame.
Weekly LUNA/USD price chart and its correlation coefficient with BTC/USD | Source: TradingView
However, the metric has remained positive for most of Terra’s history, suggesting that LUNA will continue to reflect the broader crypto market on a shorter timeframe.
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