This Crypto Has Gained 2,000% in 2021. Should You Buy?
Terra (LUNA) isn't among the biggest cryptocurrencies yet, but it's getting there. It started the year with a price of about $0.65 and a market cap outside the top 50. Since then, its value has gone up by over 2,000% to over $14 at the time of this writing, and it's in the top 25.
A price increase alone isn't necessarily a sign that a crypto is worth buying. Plenty of projects have seen short-term success despite obvious flaws. Let's look at what Terra offers to find out if it's a smart investment.
What is Terra?
Terra is a blockchain protocol that offers multiple stablecoins pegged to different currencies. A stablecoin is a cryptocurrency that aims to follow the value of another asset, such as the U.S. dollar. Terra currently offers over a dozen stablecoins, including:
- Terra USD (UST) pegged to the U.S. dollar
- Terra KRW (KRT) pegged to the South Korean won
- Terra EUR (EUT) pegged to the Euro
- Terra MNT (MNT) pegged to the Mongolian tugrik
All these stablecoins follow the value of the accompanying currency. They can be used to make purchases with businesses that accept them or as a way to transfer funds.
For an example of how Terra makes international money transfers convenient, imagine you have a business with a partnership in South Korea. You could send Terra USD and have it converted to Terra KRW, allowing both businesses to use their own currencies with minimal fees and fast transfer times.
Terra is most popular in its native country of South Korea. In May, it reported that over 2 million users in South Korea spend over $1 billion worth of its KRT token per year.
You may be wondering where Terra's native token, Luna, fits into all this. As the large price movements indicate, it's not a stablecoin -- but it is an integral part of keeping Terra's other coins stable.
How Terra's Luna token works
The principal purpose of Luna tokens is maintaining the price of Terra's stablecoins. Terra uses an algorithm to either expand or reduce the supply of its stablecoins based on demand. To do this, it lets token holders swap Luna for stablecoins and vice versa.
Let's say that there's high demand for UST, which has pushed the price above $1. Terra will allow those with Luna tokens to convert $1 worth of Luna into 1 UST. They can then sell that UST for more than $1 and make a profit on the deal.
To sum it up, Luna token holders come out ahead, giving them an incentive to trade Luna for UST. When they sell their new UST, that increases the UST supply, helping reduce the price back to $1.
The same type of deal is available for UST holders when demand is low and its price is down. In that situation, holders can profit by swapping UST for Luna. This decreases the UST supply and increases the price.
There are also other benefits to holding Luna tokens. All the holders who stake their Luna, meaning those who commit their tokens to verify transactions, receive transaction fees from payments made using Terra's stablecoins. The tokens are still yours, and you're free to unstake them later if you want.
Luna is also a governance token, so holders have the right to vote on proposed changes to Terra.
Anchor and Mirror protocols
Stablecoins aren't the only reason people are excited about Terra. It also has launched two interesting protocols called Anchor and Mirror.
Anchor is designed for crypto lending and saving. On the saving side, Anchor offers a 20% interest rate on UST deposits. That's an extremely high rate on an asset intended to follow the U.S. dollar. However, it's worth noting that protocols like these don't offer the same security you'd get with savings accounts.
Mirror is a way to create crypto assets that follow the prices of shares in publicly traded companies. They're essentially synthetic stocks, so the Mirror protocol is a way for traders around the world to invest in the U.S. stock market.
This protocol isn't without its issues. Prices for these synthetic stocks can be slightly off compared to the real stocks. And there's a strong possibility that the Securities and Exchange Commission (SEC) could try to crack down on Mirror in the future.
Should you buy Terra's Luna token?
If you're looking for altcoins with high growth potential, Luna could be a good choice. It's not available on many of the top cryptocurrency exchanges right now, but you can get it through any of the following:
Stablecoins could very possibly end up being the most widely used type of cryptocurrency. Most cryptocurrencies will have trouble catching on as ways to make payments or send other people money. They're just too volatile. If you spend them and the price goes up, you'll regret it.
Terra focuses on providing stablecoins while including a valid reason to hold its Luna tokens. It has also already built a solid customer base in South Korea. And even though it doesn't offer many stablecoins yet, it could see more growth once it does.
There are always risks to investing in cryptocurrency, so you shouldn't put in more than you could afford to lose. Terra's stablecoins may not achieve widespread popularity. The company could have funding troubles or run afoul of regulators due to its Mirror protocol.
Even with those caveats, Luna has plenty of room to grow. It's not even on the biggest exchanges yet, and if that changes, it could certainly increase this token's value. Deciding to invest depends on whether you think Terra will continue to build on what it has done so far.
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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly owns shares of Ethereum. The Motley Fool owns shares of and recommends Ethereum. The Motley Fool has a disclosure policy.
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