By Alun John

HONG KONG, (Reuters) – TerraUSD, fourth largest stablecoin in the world, fell by a third on Tuesday. This spooked cryptocurrency investors and contributed to bitcoin falling below $30,000 for only the 10th time in 10 month.

Stablecoins can be described as digital tokens that are tied to traditional assets such the U.S. Dollar. These tokens are used as a safe-haven in turbulent crypto markets. They also serve to exchange funds and allow traders to speculate on other cryptocurrency.

TerraUSD is a crypto-algorithmic stablecoin, currently fourth largest in market capitalization. On Tuesday it broke the $1 peg to USD and dropped as low as $0.67 according to Coingecko.

This token was first prominently promoted earlier in the year by Terraform Labs affiliate Luna Foundation Guard. TerraUSD is Terraform Labs’ company behind TerraUSD. Luna Foundation Guard pledged $10 billion of bitcoin for its support.

TerraUSD keeps its peg unlike other stablecoins with traditional asset reserves. It uses an algorithm to moderate supply and demand through a complicated process that involves the use Luna as a balancing token.

Luna Foundation Guard tweeted Monday, saying that TerraUSD would be protected by $1.5 billion of loans to Over-the-Counter Trading Firms. Half in Bitcoin and the other in TerraUSD.

Luna Foundation Guard and Terraform Labs couldn’t be reached for comment.

Justin d’Anethan, Amber Group’s sales director, stated that the use of Bitcoin as a reserve has created a vicious circle for TerraUSD with both selloffs and the one driving the other lower.

“is going down because it’s being bought to defend an ecosystem which is suffering, this is creating more panic on TerraUSD, which is weighing upon the Luna token which requires the foundation use more reserves for supplementing and defending the peg,” he said.

It’s not fun to be there.

Bitcoin dropped to $30,000 on Tuesday, the highest level since July 2021. It was also falling with other “risky” assets like tech stocks and TerraUSD, which was also impacting the Bitcoin price.

QCP Capital, a Singaporean analyst firm, stated in a note that although bitcoin has been holding steady at its current support level at the time of writing, there is a material tail risk to it from (TerraUSD). De-pegs and other macro risks.