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Educating Retail: Lessons from the Terra-Luna Collapse

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By Joe Jowett, CEO, StrikeX.

The collapse of Terra has been one of the most significant events in the digital assets marketplace this year. The gains in the sector during the pandemic are now well-documented – Coinbase’s user base more than doubled between late 2019 and 2021 and Bitcoin saw a 300% increase in valuation in 2020.

As the number of users on trading platforms has stabilised in 2022, users have found themselves looking for more security in trading as a result of inflation and geopolitical tensions. The decline in Terra’s market valuation from $41 billion to $6.6 million in May after de-pegging from the US dollar saw investors’ worst fears realised.

More than 15% of current online retail investors only began trading following the onset of the pandemic. Many of these are in the Millennials and Gen Z age groups, making it vital to educate young, inexperienced traders. Newer traders may be unaware of the potential risks of retail trading, and with tighter regulation around crypto looming, the onus is on trading platforms to provide the necessary education and assistance for new users.

The warning signs

The Terra crash did not come entirely out of nowhere, with reports highlighting concerns over the issues of the stablecoin pegging against the US dollar. Some found Terra’s associated Anchor protocol unsustainable, whereas others could not see the possibility of creating a currency and assigning it a specific value without collateralised reserves.

Terra was built as an algorithmic stablecoin, using its satellite asset Luna to absorb volatility and maintain Terra’s value. If Terra’s price began fluctuating above or below $1, people could use Terra to buy Luna, or vice versa, therefore maintaining Terra’s trading price. Whereas other stablecoins would keep an equivalent amount of what they were pegged to as reserves, Terra’s worth was predicated entirely on Luna.

While innovative, it is unsurprising in retrospect that the Terra-Luna collapse occurred. As an algorithmic stablecoin, Terra’s stability was always purely theoretical. When the price of Bitcoin dropped in early May, Terra holders mass converted Terra into Luna, creating an oversupply of Luna tokens. This resulted in a crash of the value of Terra and Luna to as low as $0.26 and nearly $0 respectively.

Many of the investors who were hurt by the collapse would not have seen it coming. Stablecoins are billed as a reliable investment in the unpredictable world of crypto, making it an attractive choice for young investors to hedge their bets. Greater transparency and education will empower users to make informed decisions and identify red flags to help avoid being swept up in another potential Terra style collapse

Regulation looms

Stricter cryptocurrency regulation is coming, it is a case of when, not if. The Terra-Luna collapse has brought to the fore the importance of protecting consumers, with US Treasury Secretary Janet Yellen speaking out in favour of regulating stablecoins recently.Terra is not the only stablecoin experiencing a crisis: Tether, also pegged to the US dollar, has seen fluctuations in value and heightened scrutiny over its backed assets.

Since the start of 2021, the UK government has had stablecoin regulation on its radar, and in April this year announced its plans for stablecoin regulation as part of the UK’s initiative to become a ‘crypto hub’ It remains to be seen how regulation will affect the crypto world – the EU’s planned Markets in Crypto-Assets bill may include a requirement for stablecoin issuers to hold capital funds equivalent to 3% of their reserve assets The UK, meanwhile, has the opportunity to introduce alternative regulations that may be more beneficial for issuers and holders alike.

Ultimately, it is up to issuers and online trading platforms to be proactive to further legitimise themselves and avoid harsh sanctions. Proving transparency and responsibility will be crucial for trading platforms to show that they have their consumer’s best interests in mind, and therefore comply with legislations before they are put into place, without stifling any innovation or democratisation.

Democratising cryptocurrency

The appeal of cryptocurrency lies in its fair, decentralised approach that removes central banks from controlling the transfer of capital. Yet if trading platforms do not educate their users responsibly, regulations may be put in place that bring them closer to financial institutional systems. It’s important to remember that there is a barrier to entry for crypto – a recent study saw 57% of respondents citing a lack of knowledge as the main barrier from investing in crypto, while 60% of those surveyed identified themselves as ‘not very’ or ‘not at all’ knowledgeable about crypto.

Consequently, educational tools need to be provided by trading platforms. Tutorial libraries, safety mechanisms, and news aggregators are all features that platforms can implement to empower retail traders and help them reap the rewards of crypto while making informed decisions.

StrikeX’s upcoming flagship trading platform will do just that. Cryptocurrency should be accessible for all, and empower those marginalised by the traditional financial system. By giving users the control to trade tokenised assets and crypto on the same platform anytime, anywhere, trading can democratise the entire financial ecosystem. After all, crypto is for the people – let’s give them the education they deserve.

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