Terra’s BTC Buying Spree Effect On Bitcoin Price

The ecosystem of layer 1 Terra has been on the rise for the past year. Apart from being cheap and easy to use, one of the best features of Terra is its native stablecoin UST. The coin is pegged to the US dollar and can be used to pay for gas fees on the network.

UST is a decentralized and algorithmic stablecoin, this means it is backed by its own endogenous cryptocurrency. In this case, that coin is LUNA. Anyone can mint UST by burning the same dollar amount of LUNA. On the contrary, you can also burn UST to mint LUNA. In this way, the supply of LUNA will shrink or expand to keep UST at 1 dollar. It is safe to say LUNA is the backbone of the terra ecosystem.

In January 2021, Terra Labs, the company behind the Terra blockchain, decided to create Luna Foundation Guard (LFG). This is a non-profit organization dedicated to helping grow the Terra ecosystem and assure UST maintains its peg to the dollar. Terra Labs decided to fund this new organization with approximately 4 billion dollars worth of LUNA.

Since then, LFG has been helping the community by giving away grants to builders and educators. Recently, they decided to use a large part of their reserves to purchase Bitcoin and use it to back UST. In that way, if LUNA happens to lose a lot of its value, there is another asset that can help UST maintain its peg. During the last 60 days, Luna Foundation Guard has acquired more than 80,000 BTC.

Does LFG’s buying spree have any real effect on Bitcoin’s price?

Let’s look at the numbers. Since March 2021, LFG has purchased on average about 1500 BTC per day or approximately 65 million dollars. This is less than 1% of the billions of dollars traded in BTC every day. This means the buying pressure led by LFG is likely not directly affecting bitcoin’s price.

Nevertheless, having Terra, the second biggest DeFi chain using BTC as a safe haven to maintain UST’s value, drives positive sentiment on the market. This move proves BTC can serve as a store of value and may entice other crypto projects to add BTC to their reserves too. If this starts to happen, it may push bitcoin into a new price rally.