Market Manipulation Risk in Crypto

The digital assets space just underwent arguably the most significant blow to its credibility to date – and some people believe Wall Street is to blame. Whether or not these speculations are correct, one thing seems certain: it was a clear case of market manipulation.

One of the top digital assets projects – TerraLabs with its token Luna and “stablecoin” UST – has been, for all practical reasons, forcefully bankrupted. Folks in the crypto space have taken to Reddit and Twitter, where they’ve expounded a variety of theories on the swift takedown of Terra. A Twitter thread
with thousands of likes, retweets, and comments makes the case that the attack was a coordinated
attempt by Bitcoin shortsellers on Wall Street. They believe that a large player recognized that unstaking millions in UST at once would cause the stablecoin to depeg from the dollar, forcing the Terra team to sell significant Bitcoin reserves to repeg the stablecoin. Once investors became aware of the situation, they would also unstake and sell UST, requiring even more Bitcoin reserves to be sold and creating a huge opportunity for Bitcoin shortsellers.

More likely, though, the attack had nothing to do with Bitcoin, as it is hard to create a certain movement in a more liquid product by manipulating a less liquid one, particularly when there is no direct link between the two. However, pushing UST to the point of clear depegging and forcing a wipe out of the multi-billion dollar market cap of Luna in the process is much more doable. The attackers likely held a short position in Luna and started to sell large amounts of UST, which by itself should be a “market neutral” activity (as UST is a “stable” coin). When both coins started to give in, reinforcing each other’s drop, the avalanche happened. In either case, a well targeted run-on-the-bank reinforced by a positive feedback loop from Luna’s own algorithmic setup resulted in a swift devaluation of assets and transfer of money from Luna and UST holders to attackers’ pockets.

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