The cryptocurrency market has seen considerably worse days before. However, the present state of the market remains unprecedented. Terra’s LUNA and UST have tumbled, triggering a chain reaction in the rest of the market. One thing is certain: investors want answers – reasons for their lost investments – now more than ever.
Where is the Luna Foundation Guard’s (LFG) $2 billion worth of Bitcoin? Terra’s CEO established the Luna Foundation Guard (LFG) to help the Terra ecosystem develop. After the collapse of Terra, LFG has still not addressed a fundamental question regarding its Bitcoin reserves. The real question is: where is it? Why wasn’t this power used to prevent LUNA and UST from de-pegging? What is it currently being used for?
LFG Terra’s $2 billion Bitcoin reserve mystery
According to CoinMarketCap, UST is currently valued at 0.21 USD, down 98% from its all-time high earlier in the year. According to market analysts, LFG’s operation has failed as it accumulated 70,736 bitcoins (over $2 billion) as “forex reserve” for Terra UST, an amount that stands in question. The stablecoin has recently been extremely depegged and wreaked havoc in the cryptocurrency market.
The UST is a decentralized algorithmic stablecoin that uses code to maintain its price at around $1, according to a delicate yet complex system of minting and burning. Developers designed a complex system to keep the dollar peg: some of the related cryptocurrency LUNA gets destroyed to create UST.
Unlike rival stablecoins Tether and USD Coin, UST isn’t backed by anything real-world, such as bonds. Instead, the Luna Foundation Guard (LFG), a non-profit headed by Do Kwon of Terra fame, safeguards roughly $3.5 billion in Bitcoin reserve.
On 5 May 2022, the LFG bought $1.5 billion in Bitcoin to supplement its most popular stablecoin, known as U.S. Terra. That move by the Luna Foundation Guard brought it closer to its objective of amassing $10 billion worth of Bitcoin to back the UST stablecoin.
The UST Forex Reserve has amassed about $3.5 billion in Bitcoin, putting it among the world’s top 10 bitcoin holders. It also possesses nearly $100 million in avalanche, another cryptocurrency.
Last week, the LFG completed a $1 billion OTC swap with Genesis Capital for $1 billion worth of UST in its most recent Bitcoin acquisition. It also acquired $500 million of bitcoin from crypto hedge fund Three Arrows Capital.
The last time the Luna Foundation Guard purchased $1 billion in Bitcoin, Bitcoin hit an all-time high of $48,000 for the first time since 31 December. However, what investors are witnessing is more of a miniature version of George Soros attacking the British Pound’s peg, where LFG is playing the Bank of England with a comparable outcome, it appears.
Where is the reserve Bitcoin?
LFG bought those bitcoins to preserve UST, but it couldn’t do so. UST, a supposed stablecoin that should always have been worth $1, has lost virtually all of its value. The market currently values it at about $0.21.
In the end, LFG’s Bitcoin reserves proved insufficient to support the UST peg against the dollar. LFG just gave a “loan” of $750 million in Bitcoin to over-the-counter trading firms and market makers to safeguard the UST peg out of its total Bitcoin reserves.
As a result, LFG’s reserves should be worth $1.2 billion in Bitcoin. However, the organization has not revealed any information on those funds so far. The publicly known wallet address of LFT displays no Bitcoin balance.
As previously stated, LFG’s wallet address has so far received 70,736 bitcoins, valued at over $2 billion. It has also sent out the entire amount, displaying the balance as zero. It is unclear where it has sent those funds. On-chain labeling of private wallets isn’t possible because of the Bitcoin blockchain‘s privacy features.
Analysts and investors note that it is strange that there is no clear accounting of what occurred to the Bitcoin reserve. The $750 million was dispersed among market makers, leaving it unclear what happened to the rest of the treasury funds. LFG has also failed to provide the information on the $750 million loans, such as who the borrowers are, the interest rate, or whether it is still in progress.
According to crypto experts, LFG may have sold all of Bitcoin’s reserves since that was supposed to be the goal of UST’s peg repair. Some of it could also be set aside for a future purpose that is unknown or unannounced. The LFG reserve remains the nearest Hail Mary that might have kept the Terra ecosystem afloat.
When it comes to UST, investors are shocked that LFG sought out more funds in addition to the existing reserve. According to reports, they requested an additional sum of over $1 billion to maintain the peg of the stablecoin. However, since LFG hasn’t issued any statements on the matter, those efforts appear to have stalled.
The controversy surrounding TerraUSD has spread to the broader cryptocurrency market. That’s because the Luna Foundation Guard is keeping Bitcoin as a reserve. The concern is that the organization squandered or hesitated to assist Terra’s recovery for questionable and self-serving motives.
Again, this creates a recursive market where bad performance leads to additional unfavorable sentiment, which feeds back into more terrible performance.