An Econometric and Time Series Analysis of the USTC Depeg’s Impact on the LUNA Classic Price Crash During Spring 2022’s Crypto Market Turmoil

Abstract

The cryptocurrency market is characterized by extreme volatility, with events such as the Terra-LUNA crash of 2022 raising significant questions about the resilience of algorithmic stablecoins. This paper investigates the collapse of LUNA Classic during the USTC depeg, focusing on the role of trading volumes and collateral assets like Bitcoin in amplifying the price crash. Using a Vector Logistic Smooth Transition AutoRegressive (VLSTAR) model, we analyze daily data from October 2020 to November 2022 to uncover how exogenous volumes influenced LUNA’s price trajectory during the crisis. Our findings reveal that high trading volumes, particularly during regime two (the post-depeg period), significantly exacerbated the price decline, validating the impact of large-scale liquidations on LUNA’s price path. Additionally, Bitcoin volumes played a critical role in destabilizing the system, confirming that the liquidity of underlying collateral assets is pivotal in maintaining price stability. These insights contribute to understanding the systemic vulnerabilities in algorithmic stablecoins and offer implications for future stablecoin design and risk management strategies. They are relevant for investors, policymakers, and researchers seeking to be aware of market volatility and prevent future crises in stablecoin ecosystems.