Why Did TerraUSD and Luna Crash? The Risk Lessons Every Investor Should Keep
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By Spencer Li, CFTe · Last updated: 26 October 2026
TerraUSD (UST) crashed in May 2022 because it was an algorithmic stablecoin. Instead of holding a dollar in reserve for every token, it kept its $1 price through a swap with a sister token, LUNA. When big holders pulled out and UST slipped below $1, the system printed more LUNA to defend the peg, LUNA’s price collapsed, and that frightened even more holders into leaving. It was a bank run without a bank. Within a week, LUNA was close to worthless and UST was trading around 15 cents, and US prosecutors later put investor losses at over $40 billion.
The lesson I took from it in 2022 still holds. Every investment carries risk. Knowing how a product works is a different thing from knowing how it can hurt you.
What did I tell Business Insider?
In June 2022, a month after the crash, Weilun Soon of Business Insider was writing about retail investors who had lost their savings in TerraUSD, and he asked me a few questions. One answer made it into the article, published on 10 June 2022.
“The onus then falls on investors to do their due diligence. A better solution would be to impart the basic universal skills that allow a retail investor to manage the risks,” I told him.
The rest of my answers are below, updated with what came out later in court.
What is a stablecoin, and how was TerraUSD different?
Think about real currencies first. Most float with supply and demand, but a few are pegged. The Hong Kong dollar, for example, moves with the US dollar.
A stablecoin is the crypto version of a pegged currency, usually pegged to the US dollar, and whether it actually holds that value depends on what sits behind it.
| Type | What holds the peg | Example | What can break it |
|---|---|---|---|
| Currency-backed | Reserves of cash and short-term bonds | Tether (USDT), USD Coin (USDC) | Reserves that are smaller, or less liquid, than claimed |
| Commodity-backed | Reserves of gold or another commodity | PAX Gold (PAXG) | Custody and audit problems |
| Algorithmic | Code that creates and destroys a paired token | TerraUSD (UST) with LUNA | A loss of confidence that feeds on itself |
Tether and USD Coin say they hold reserve assets against every token, a bit like a country holding reserves to back its currency. TerraUSD held no such thing. Its own promotional material, as US prosecutors later described it, claimed that one UST “could always be exchanged for $1 worth of LUNA”. So if UST fell to 98 cents, a trader could buy it cheap, swap it for a dollar’s worth of LUNA and pocket the gap. That buying was supposed to lift UST back to $1, every time.
It worked in calm markets. In May 2021, a year before the crash, UST slipped off its peg and recovered, and plenty of people took that as proof the design was sound. In August 2025, Do Kwon, Terraform’s co-founder, pleaded guilty to fraud in New York. According to the US Department of Justice, after the protocol failed to restore the peg in May 2021, Kwon arranged for a high-frequency trading firm to buy large amounts of UST to prop it up. The proof everyone relied on was manufactured.
I go through the safer designs in more detail in my guide to the best stablecoins.
How did the crash unfold in May 2022?
Business Insider reported that UST lost its peg on 7 May 2022. For a day or two, it looked like the usual wobble. Then it stopped looking usual.
| Date (2022, daily close) | UST | LUNA |
|---|---|---|
| 5 May | about $1.00 | $82.58 |
| 8 May | $0.996 | $64.08 |
| 9 May | $0.79 | $32.00 |
| 11 May | $0.80 | $1.07 |
| 13 May | $0.15 | $0.0001 |
Daily closes in UTC from Yahoo Finance, retrieved 26 October 2026. The tokens now trade as USTC and LUNC.
So LUNA went from about $82 to a hundredth of a cent in 8 days. That is not a typo. It is roughly the fall from a nice dinner to one grain of rice.
When Business Insider asked me what caused it, I said crypto prices had been falling for months, so investors were already nervous, and UST’s reserves were mostly held in crypto too. Then several large accounts pulled big amounts of UST out, which pushed it slightly below $1. Other holders noticed and started withdrawing too, and every withdrawal lowered the price, which caused more withdrawals, which lowered the price again.
I called that a positive feedback loop, which is the polite name for a stampede. If you want a way to follow the markets without staring at a screen all day, my free 15-minute swing trader checklist is the routine I use.
Why did the run feed on itself?
Five months after UST collapsed, on 10 October 2022, the Nobel prize in economics went to Ben Bernanke, Douglas Diamond and Philip Dybvig for their research on banks and financial crises. Diamond and Dybvig built their model of bank runs in the early 1980s, decades before anyone typed the word “stablecoin”.
A bank is safe only as long as depositors do not all want their money back at once. If enough savers rush to withdraw together, the Nobel committee wrote, “the rumour may become a self-fulfilling prophecy”. Fear does the rest. The cure is a government that provides deposit insurance and acts as a lender of last resort.
UST promised instant redemption, just like a bank deposit, with no deposit insurance and no central bank behind it. Its lender of last resort was LUNA, and the only way to lend more LUNA was to print it, which made each LUNA worth less exactly when it was needed most.
So the mechanism designed to save UST is what finished it. An algorithmic stablecoin is only as strong as the confidence holding it up, and confidence is always the first thing to leave.
Were stablecoins a good investment?
When people called UST an investment, they did not mean betting on the US dollar going up. They meant Anchor Protocol, which, according to the Department of Justice, launched around March 2021 and offered “approximately 20%” a year on UST deposits.
My answer in 2022 was that it can be a good investment if you know what you are doing. That means understanding the product, understanding the risks, and taking steps to reduce them. Decentralised finance carries its own list of risks, including software bugs, counterparty failure, token risk, regulatory risk, impermanent loss and gas fees, and I explain how the pieces fit together in what DeFi is and whether it will replace banks.
There was also a warning in plain sight. A few weeks before the crash, I pointed out that traders were paying a funding rate to hold short positions against UST. When people pay to bet against a coin that is supposed to sit at $1, they are telling you something about what they expect.
And if you simply want to store value, I said then that actual US dollars were the better choice, with no depeg risk and no hacked wallet. The exception is someone stuck with a fast-depreciating currency and no easy access to US dollars.
Why did people who understood Terra still lose money?
The reporter asked me this directly, because some of the people who lost money knew the Terra network well.
I think three things go wrong, in order. Knowing how a system works does not mean you know all of its risks. Even if you know them, you may misjudge how big or how likely they are. And even if you judge them correctly, you may still do nothing, out of faith in the system.
Faith is a lovely quality in a friend and a terrible one in a portfolio. So my view then was that technical knowledge alone is not enough, and that you also need financial savviness, behavioural psychology and portfolio risk management.
Most retail investors I came across heard about UST through word of mouth, or from bloggers and influencers repeating the 20% without understanding it. So they heard 20% and stopped listening. Once greed takes over, people go all in.
If you would rather build a routine than chase yields, the free 15-minute swing trader checklist is the one I run every day.
Has anything changed since 2022?
On 15 October 2025, a trader on Reddit’s r/CryptoCurrency argued that DeFi was starting to look “less like a casino and more like an income engine”. Part of that is fair.
The rules have caught up a little. On 15 August 2023, MAS finalised a framework for stablecoins pegged to the Singapore dollar or a G10 currency and issued in Singapore. It sets rules on reserves, requires payout at par within five business days of a redemption request, and keeps its official label for issuers that meet every requirement. That is a very different animal from UST.
The legal story has moved too. Do Kwon was arrested in Europe in March 2023 on a false passport and extradited to the US on 31 December 2024, according to the Department of Justice. He pleaded guilty on 12 August 2025, and on 11 December 2025 a New York judge, Paul Engelmayer, sentenced him to 15 years in prison, as The Block reported that day.
But a rule about reserves cannot tell you where a 20% yield comes from, and a prison sentence does not refund anyone. So the question I would ask of any “income engine” is the same one UST failed in 2022. If the yield is far above what a bank or a government bond pays, who is paying it, and what happens to my money the day they stop?
What is the biggest takeaway for investors?
For seasoned investors, UST was not their first rodeo. I said then that most had likely kept their eggs in several baskets, so some would take a loss and few would go bust.
For anyone burnt for the first time, the lessons are simple.
- Do not be greedy. A 20% yield with no risk attached does not exist.
- Diversify, so that no single position can wipe you out.
- Before you buy anything, know every risk attached to it, decide how much of that risk you want to carry, and reduce the rest.
If you want to learn the universal skills I mentioned to Business Insider, my free trading guides are a good place to start.
FAQ
Why did TerraUSD (UST) and Luna crash?
UST was an algorithmic stablecoin with no cash reserves behind each token. It held its $1 peg through swaps with LUNA. In May 2022, large withdrawals pushed UST below $1, the system printed LUNA to defend the peg, LUNA’s price collapsed, and more holders fled. Within a week, LUNA was close to worthless and UST traded around 15 cents.
When did TerraUSD lose its peg?
Business Insider reported that UST lost its peg on 7 May 2022. It closed at $0.79 on 9 May and $0.15 on 13 May, according to Yahoo Finance daily closes.
How much money was lost in the Terra Luna crash?
US prosecutors put investor losses at over $40 billion. At its peak in spring 2022, the combined market value of UST and LUNA exceeded $50 billion, according to the Department of Justice. Business Insider reported a peak of $60 billion.
What happened to Do Kwon?
He pleaded guilty to fraud in New York on 12 August 2025, and on 11 December 2025 he was sentenced to 15 years in prison, as The Block reported that day.
Are stablecoins safe to hold?
Every one carries risk. A stablecoin backed by real reserves is safer than an algorithmic one, but you still carry the risk of a depeg and of a hacked wallet or exchange. If you can hold actual US dollars, that is usually the safer way to store value.
Were you holding any UST in May 2022, or did you know someone who was? And which lesson do you think the next cycle will ignore first? Let me know in the comments.
And if you want a routine that keeps risk in front of returns, grab the free 15-minute swing trader checklist.
About the author. Spencer Li is The 15-Minute Trader and the founder of Synapse Trading. He is a Certified Financial Technician (CFTe) with 15+ years of trading, run from 70+ countries. He holds a B.Acc and B.BM from SMU. Every trade he takes is public, dated, losses left in. He teaches rules-based swing trading in 15 minutes a day, one system for any market.
Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss, and past performance is not indicative of future results.
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Educational content only, not personalised financial advice. Trading carries risk, including loss of capital. Past performance is not indicative of future results. Synapse Trading is not licensed or regulated by MAS.
