Why the New Terra (Luna) Is Crashing

If at first you don't succeed, try, try again. That's the approach that the developers of Terra (CRYPTO: LUNA) decided to take after the spectacular collapse of the token.

That collapse resulted from LUNA's sibling stablecoin TerraUSD (CRYPTO: UST) losing its peg to the U.S. dollar. The intense sell-off caused the underlying algorithm behind TerraUSD to go haywire, with LUNA losing nearly all of its value.

But the carnage isn't over for the Terra ecosystem. Here's why the new Terra LUNA token is crashing.

A person holding hands to face while sitting in front of a laptop.

Image source: Getty Images.

The rescue plan

The idea seemed like a reasonable one. Terra project founder Do Kwon proposed a rescue plan for LUNA. His plan was for a new Terra blockchain to be created with a new LUNA token. This token wouldn't be linked at all to TerraUSD or any other stablecoin.

The old blockchain would become Terra Classic. It would support the old LUNA token (to be rebranded as Luna Classic) and TerraUSD. The algorithm would be ditched in favor of reserves backing the stablecoin. Owners of LUNC tokens would be given new LUNA tokens.

This idea had opponents. However, it was popular enough for around 65% of the Terra community to vote in favor of moving forward. The new Terra blockchain launched on Saturday, May 28, 2022.

At first, LUNA owners had reason to celebrate. The new token opened at $18.98 and went as high as $19.54. But then the bottom fell out, with LUNA plunging more than 80% at one point.

Not convinced

The new LUNA rebounded somewhat over the next couple of days. It's certainly not a penny cryptocurrency like Luna Classic. However, the new LUNA is still down more than 60% from its opening price over the weekend. Cryptocurrency investors don't appear to be convinced that the rescue plan will ultimately be successful.

Some previous holders of what's now Luna Classic could be tempted to sell their new LUNA tokens and run for the hills. That's completely understandable after the catastrophe they've experienced in recent weeks.

For the new Terra blockchain and new LUNA to flourish, they must attract new investors. Some curious and aggressive risk-takers could step up to the plate. However, it seems likely that most crypto investors will take a wait-and-see position.

The overall environment for cryptocurrencies remains dismal. Those investors who are willing to put their money on the line right now are probably going to be more drawn to digital tokens that don't have the baggage that comes with the Terra ecosystem.

Time is a factor

Volatility should be expected for the new LUNA, especially in the first few days after its launch. However, time is definitely a factor to consider. The longer new investors stay on the sidelines, the more jeopardy there will be for Terra's rescue plan.

That doesn't mean that the new LUNA can't come back, of course. It's still possible that the token will accomplish what Kwon envisioned. Perhaps Terra will rise from the ashes. At this point, though, there are too many uncertainties for most investors to even consider buying the new LUNA.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Terra. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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