Holders of celebrated “Ethereum killer” Avalanche (AVAX) woke up today to see a surprising double-digit decline in the project’s price on cryptocurrency exchanges. At the time of writing, CoinMarketCap showed that AVAX was down 15% to a 24-hour low of $27.21 per coin. The same website shows that the native coin of the ultrafast and low-cost Avalanche smart contract blockchain was down more than 62% since its 30-day high of $73.09 on April 25, 2022.
But before we talk about Avalanche, let’s answer the question – what is Avalanche?
Avalanche is an open, programmable smart contracts platform that launched its mainnet in September 2020. Its native token is AVAX, a hard-capped digital asset used for the platform’s payments, security, and connection functions. It gained recognition as a popular platform for DeFi (decentralized finance) applications such as Pangolin and TraderJoe.
Launched in September 2020 by Ava Labs, Avalanche aims to deliver a scalable blockchain solution that’s faster and cheaper than other layer-1 smart contract protocols. The three people behind Avalanche are Kevin Sekniqi, Maofan ‘Ted’ Yin, and Emin Gün Sirer.
At launch, 360 million AVAX were minted and sold through private and public sales, and the tokens hit the market with the initial price set at about US$5. During the first public sale of its digital currency token, Avalanche raised $42 million in less than 5 hours. In 2021, Avalanche grew close to 3,000%, breaking into the crypto top 10 and emerging as a credible opponent to Ethereum.
Avalanche’s Avalanche
The most likely reason for the bulk of that decline is the continuing uncertainty surrounding the struggling tandem projects of Terra (LUNA) and TerraUSD (UST). AVAX is connected to those two projects run by the Luna Foundation Guard (LFG) because the LFG had bought nearly 2 million AVAX coins worth $100 million to hold in reserve as backstop assets. As recently as May 5, AVAX made up 77% of the total LFG reserve fund, representing its top holding.
However, because of the combined crypto contagion last week of the UST stablecoin depegging from the value of the U.S. dollar, and LUNA’s automated attempt to stabilize its companion stablecoin project by flooding the market, the broader crypto sector was hit hard. But the LFG reserve currencies seem to have been hit hardest.
Last week LPG liquidated its total holdings of Bitcoin (BTC) worth $3 billion to help recalibrate UST. While it was down significantly then, BTC has bounced back and is mirroring the overall crypto market now that it’s no longer a de facto reserve currency for LUNA/UST. That doesn’t seem to be the case for AVAX right now.
Today the Foundation shows that it still holds the same number of AVAX coins — it didn’t sell a single one — but due to the precipitous price decline, AVAX is now only 27% of the total LUNA/UST reserve portfolio. That could be a contributor for today’s AVAX decline, when combined with a lousy looking technical chart that signals the potential for a further bearish downturn for Avalanche.