The global cryptocurrency market experienced a severe downturn, with billions wiped out in value and several high-profile digital assets crashing dramatically. Bitcoin dropped below $26,000 for the first time in over a year, while Ethereum fell beneath $2,000. Most notably, the algorithmic stablecoin TerraUSD (UST) and its sister token Luna suffered catastrophic failures, with both nearly collapsing to zero.
This market turmoil has reignited concerns about volatility, investor confidence, and the long-term sustainability of decentralized finance (DeFi) models that rely on unproven mechanisms rather than tangible reserves.
Bitcoin and Ethereum Tumble Amid Broader Market Sell-Off
On May 13, Bitcoin plunged to a low of $25,401.29 — its weakest level since December 2020 — before recovering slightly to close at $28,569.25, marking a 2.9% daily loss. This represents the first time in 16 months that the leading cryptocurrency has dipped below the $26,000 threshold.
Ethereum, the second-largest digital asset by market cap, fared even worse. It dropped as low as $1,704.05, breaching the psychologically significant $2,000 level for the first time since June 2021. By the end of trading, Ethereum had lost 8.8%, settling at $1,937.88.
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The broader sell-off erased more than $200 billion from the total crypto market capitalization within 24 hours. Investors have grown increasingly risk-averse due to rising inflation, tightening monetary policy, and fears of an impending recession — factors that are affecting both traditional and digital asset markets.
TerraUSD (UST) Crisis Shakes Confidence in Algorithmic Stablecoins
At the heart of this market crisis is TerraUSD (UST), an algorithmic stablecoin designed to maintain a 1:1 peg with the U.S. dollar through automated supply adjustments rather than cash reserves.
However, in early May, UST began to lose its peg, falling below $0.30 at one point. Despite emergency measures taken by its creators, it continued to trade around $0.41 — far from its intended value.
Unlike traditional stablecoins such as Tether or USD Coin (USDC), which are backed by real-world assets like cash or short-term bonds, UST relied solely on code-based mechanisms and arbitrage incentives involving Luna, its volatile counterpart token.
When confidence waned, large holders started dumping UST en masse. To defend the peg, the system minted more Luna tokens to absorb excess UST — a move that led to hyperinflation of Luna’s supply and a death spiral in price.
Luna Token Crashes 99%: From $120 to Near-Zero
Luna, once valued at over $120 per token, collapsed spectacularly to just $0.007 — a decline of more than 99%. The token’s market capitalization evaporated almost entirely, wiping out billions in investor wealth virtually overnight.
This crash highlights the dangers of algorithmic stability models that lack sufficient collateral or fail-safes during extreme market stress. Without real reserves to fall back on, these systems can unravel quickly when trust erodes.
The Terra ecosystem was built on the promise of decentralized, self-regulating finance — but this incident revealed critical vulnerabilities in that vision.
Bitcoin Reserves Used to Prop Up Failing Stablecoin
A major contributing factor to the broader market selloff was the actions of the Luna Foundation Guard (LFG), a reserve fund established by Terra co-founder Do Kwon. Prior to the crisis, LFG had amassed over $3 billion worth of Bitcoin to serve as a backstop for UST during periods of instability.
As UST began losing its peg, LFG initiated large-scale Bitcoin sales in an attempt to stabilize the stablecoin. However, these sales coincided with already weak market conditions — amplifying downward pressure on Bitcoin’s price and triggering further panic across the crypto space.
Critics argue that relying on one volatile asset (Bitcoin) to support another (UST) created a dangerous feedback loop. Rather than restoring confidence, the intervention accelerated the collapse.
Tether Briefly Loses Peg: Ripple Effects Across Stablecoin Sector
Even Tether (USDT), the largest and most widely used stablecoin, felt the shockwaves. On May 12, USDT temporarily dropped to $0.95 amid fears of contagion and massive redemption requests.
While it quickly recovered its peg thanks to strong reserve transparency and liquidity buffers, the event raised serious questions about systemic risk in the stablecoin sector.
For years, economists and regulators have warned that many stablecoins may not hold adequate reserves to withstand a full-scale "bank run." The UST collapse serves as a real-world test case — and a cautionary tale for investors relying on digital dollar equivalents.
Key Cryptocurrency Keywords Driving Market Sentiment
Core keywords identified in this event include:
- Cryptocurrency market crash
- Bitcoin price drop
- Ethereum decline
- TerraUSD collapse
- Luna token failure
- Algorithmic stablecoin risk
- Market volatility
- DeFi crisis
These terms reflect growing public interest and search intent around crypto instability, investment risks, and regulatory scrutiny — all crucial for SEO visibility and reader engagement.
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Frequently Asked Questions (FAQ)
Q: What caused the cryptocurrency market crash in May 2025?
A: A combination of macroeconomic pressures — including high inflation and rising interest rates — triggered a broad risk-off sentiment. The collapse of TerraUSD and Luna intensified panic, leading to massive sell-offs in Bitcoin and Ethereum.
Q: Why did TerraUSD lose its dollar peg?
A: UST relies on an algorithmic mechanism tied to Luna instead of actual dollar reserves. When large investors began selling UST, confidence broke down, and the rebalancing system failed under pressure.
Q: Is it safe to hold other stablecoins like Tether or USDC?
A: Generally yes — Tether and USDC maintain substantial reserves and undergo regular audits. However, all stablecoins carry some counterparty and regulatory risk, so diversification is wise.
Q: Can Luna or UST recover from this crash?
A: The original chains have been effectively abandoned. A new version of Luna (Luna 2.0) was launched without the stablecoin mechanism, but it holds minimal value compared to its predecessor.
Q: How did Bitcoin sales affect the market?
A: The Luna Foundation Guard sold billions in Bitcoin trying to save UST. These large sell orders came during a fragile market phase, accelerating Bitcoin’s decline and spooking other investors.
Q: What lessons can investors learn from this event?
A: Never assume stability based on design alone. Always assess underlying collateral, transparency, and real-world resilience — especially in DeFi projects promising high yields with low risk.
Navigating Uncertainty: What’s Next for Crypto?
While this episode exposed serious flaws in certain DeFi experiments, it also underscores the importance of robust risk management and due diligence. As regulators worldwide take note, we may see stricter oversight of stablecoins and greater demand for transparent reserve reporting.
For investors, staying informed and using secure platforms is more important than ever.
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