The terraUSD stable coin is falling further from its intended $1 peg, causing panic among investors.
The token fell as low as 62 cents before regaining ground, as holders continued to flee the token in what some have described as a bank run.
UST is a stable coin created by Singapore-based Terraform Labs. It is part of the Terra project and is meant to track the value of the dollar.
Terra doesn't have cash or assets in a reserve to back its token. It uses a mix of code and a sister token to keep prices stable.
Luna Foundation Guard, an organization that supports the Terra project, is sitting on billions of dollars in bitcoins that could be dumped onto the market at any time.
Matt Hougan, chief investment officer at Bitwise Asset Management, said that every professional investor is watching to see if UST can maintain its peg to the dollar.
When the price of UST falls below the dollar, it can be taken out of the Terra protocol.
The creator of Terra bought $3.5 billion worth of bitcoins to provide a back up for UST in times of crisis. The theory was that UST could eventually be redeemed for luna, but this is not yet reality.
On Monday, the Luna Foundation Guard said it would lend $750 million worth of bitcoin to trading firms to help protect the UST peg, and a further 750 million UST will be lent out to buy more bitcoins.
The organization said it had borrowed over a billion dollars worth of bitcoins.
Several investors are worried that Luna Foundation Guard might sell a large amount of its bitcoins to prop up UST. UST's decline has sent shock waves through the market.
The world's largest digital currency briefly fell below $30,000, hitting its lowest price in over a year. At 7 a.m. In the last 24 hours, the price of the virtual currency was down around 5%. It is down more than 50% from its all-time high.
In the past 24 hours, Luna has halved in value. The price was $32 at the time.
Due to a high volume of pending withdrawal transactions, the largest exchange by market volume is temporarily suspending withdrawals of both UST and luna.
Once the network is stable, the firm will resume withdrawals for the token.
Nic Carter, co-founder of Coin Metrics, told CNBC that the market is expecting forced selling on the part of Terra and the reserve. This is no exception and no algorithmic stable coin has ever succeeded.
The problem with UST is that it is backed by faith.
He told CNBC that it was not fully backed by reserves.
Terraform Labs didn't reply to many requests for comment.
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