LUNA Drops 20% In One Day As Whales Dump UST Stablecoin - Is There A Future Sell-Off Risk?

Terra rausd (UST), the native stablecoin of Terra (LUNA), suffered a sharp price drop following a FUD attack.

LUNA/USD fell 20% between May 7 and May 8 to hit $61, its lowest level in three months, after whales dumped $285 million worth of UST. As a result of this sell-off, UST briefly lost its peg to the U.S. dollar, falling as low as $0.98.

LUNA Oversupply

In accordance with Terra's flexible monetary policy, LUNA is the collateral asset that maintains UST's peg to the U.S. dollar. Therefore, when the value of UST is above $1.00, the Terra protocol incentivizes users to burn LUNA and mint UST. Instead, the protocol rewards users for burning UST and minting LUNA when the price of UST drops below $1.00.

Therefore, LUNA’s valuation should decline during periods of reduced UST supply. Messari researcher Will Comyns pointed out that similarly, when the supply of UST increases, so does the valuation of LUNA.

The graph below shows the trend of continuous decrease in daily UST supply while the relative increase in daily LUNA supply. On May 8, UST's market contracted for the first time in two months, falling to negative 28.1 million. Meanwhile, the supply of LUNA increased by over 436.75 million.

A daily supply glut, while market demand appears to be declining or stabilizing, could be the reason why LUNA stock is moving lower.

Will Terra be more painful in the future?

Terra's continued price decline prompted LUNA to retest the confluence of support formed by its 50-day exponential moving average (50-day EMA; red waves) near $56 and a more than one-month-old upward sloping trendline.

Interestingly, the rising trendline forms a rising wedge pattern with another rising trendline above it. Rising wedges are bearish reversal moves, so their presence on Terra's weekly chart suggests more downside is likely.

As a rule of technical analysis, the breakdown of a rising wedge pushes the price down to the maximum distance between the upper and lower trendlines of the structure.

Therefore, if LUNA breaks below the wedge from the current confluence of support, its price could drop to around $22.50 on the back of increased volume, a drop of more than 60% from today's price.

Conversely, a bounce off the confluence of support would set LUNA up for a move above the trendline of the wedge at $130 (a record high).