Bitcoin investors are panicking as the terraUSD stablecoin continues to drift away from its intended $1 peg.

Late Monday, TerraUSD, or UST, fell below 70 cents for the first time, as holders fled the token in what some have dubbed a “bank run.” According to Coinbase data, the coin plummeted as low as 62 cents before rebounding ground and trading at 90 cents on Tuesday.

UST is a “algorithmic” stablecoin that was created by Terraform Labs in Singapore in 2018. It’s part of the Terra blockchain project and, like tether and USDC, is designed to monitor the value of the dollar.

Terra, unlike previous cryptocurrencies, does not have a reserve of cash or other assets to back its token. Instead, it uses a sophisticated mix of programming to keep prices stable, along with a sister token called luna.

UST is essential for bitcoin investors because the Luna Foundation Guard, which supports the Terra project, has billions of dollars in bitcoin that could be dumped on the market at any time.

″Every professional investor in crypto has one eye on UST today, watching to see if it can maintain its peg to the dollar,” said Matt Hougan, chief investment officer at Bitwise Asset Management. “There’s clearly significant risk in the market.”

To put it another way, the Terra protocol adjusts supply by destroying and creating new UST and luna units. When the price of UST falls below the dollar, it can be removed from circulation and traded for luna, reducing UST supply and raising its price – at least, that’s how it should operate in principle.

To make matters even more complicated, Terra’s inventor, Do Kwon, purchased $3.5 billion in bitcoin as a backstop for UST in times of crisis. The theory was that UST may ultimately be exchanged for bitcoin rather than luna, however this has yet to be proven.

According to statistics from blockchain analytics platform Nansen, deposits into Terra’s primary lending protocol, Anchor, have dropped from 10.3 billion tokens on May 6 to barely 6.4 billion on Tuesday. On their UST assets, Anchor promised users a nearly 20% annual percentage yield, which many analysts feel is unsustainable.

Kwon’s Luna Foundation Guard announced on Monday that it will lend $750 million in bitcoin to trading firms to “help protect the UST peg,” with another 750 million UST lent out to buy more bitcoin “as market conditions normalise.”

The company announced in a follow-up tweet that it has withdrawn 37,000 bitcoins worth more than $1 billion at current prices to lend out. According to Luna Foundation Guard, “very little” of the borrowed bitcoins has been spent, but it is “currently being used to buy” UST.

Several crypto investors are concerned that Luna Foundation Guard may have sold or would sell a big percentage of its bitcoin to prop up UST, as the group’s bitcoin wallet is now fully empty, according to analysts.

UST’s collapse has sent shockwaves through the crypto market amid all of this uncertainty.

Bitcoin, the world’s most popular digital currency, dipped below $30,000 for the first time since July 2021. Bitcoin was trading at $31,324 at 7:00 a.m. ET, down almost 5% in the last 24 hours. It’s already down more than 50% from its all-time peak in November.

In the last 24 hours, the value of Luna, UST’s equivalent, has roughly half. It was recently trading at $32 per share.

Binance, the world’s largest crypto exchange by market capitalization, has temporarily halted withdrawals of both UST and luna “due to a high volume of pending withdrawal transactions,” claiming network congestion.

Binance said it would “continue to monitor” network issues and has resumed withdrawals.

“I think the market is expecting some forced selling here on the part of Terra and the reserve,” Nic Carter, co-founder of Coin Metrics, told CNBC. “It is a calamity but very expected. No algorithmic stablecoin has ever succeeded and this is no exception.”

He added that the problem with UST is that it’s largely “backed by faith.”

“It’s not fully guaranteed, it’s certainly not fully backed by reserves,” he told CNBC. “It was really just backed by faith in the issuer effectively.”

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