Terra Bitcoin Buying Helps Keep Prices Near $40K For Now

Key Points

• Terra announced another $174M in bitcoin purchases on Wednesday as it continues boosting its UST reserve.
• Traders said Terra’s large purchases are helping to keep bitcoin supported in the $40K area.
• But amid unfavourable macro conditions given recent hawkish Fed vibes, traders warn of more bitcoin selling.

Continued large purchases by Terra and its associated nonprofit organisation the Luna Foundation Guard are helping to prop up bitcoin and keep it supported near the $40,000 level, traders said on Wednesday.

At the start of the week, a fall in US tech stock prices, a strengthening of the US dollar, and rising US bond yields as markets bet on a faster pace of Fed tightening weighed on bitcoin, sending it tumbling as low as the $39,000s.

But the world’s largest cryptocurrency by market capitalisation has since stabilised near the psychologically important $40,000 level.

Though headline US Consumer Price Inflation was revealed to have risen to a new four-decade high on Tuesday, core measures of inflation weren’t as hot as feared, giving markets some respite amid a modest pullback in Fed tightening expectations for later this year.

This is one factor that has helped bitcoin stabilise, though continued large Terra purchases are also being cited as supportive of sentiment.

Terra Buys Another $174M Bitcoin

Terra was reported to have purchased an additional 4,117 bitcoins worth $174M for its UST forex reserve as of Wednesday morning.

UST is an algorithmic stablecoin pegged 1:1 to the US dollar. It maintains its peg with the backing of the Terra blockchains native LUNA token using a mint/burn mechanism that incentives arbitrage.

In an effort to strengthen confidence in UST’s ability to maintain its peg, Terra recently announced plans to purchase as much as $10B in bitcoin to act in reserve.

2,508.94 of these bitcoins, worth slightly over $100M, were purchased by the Luna Foundation Guard, according to BitInfoCharts data that tracks the top bitcoin wallets.

The Luna Foundation Guard now hows 42,406.92 bitcoin at a current market value of $1.69B, making them the 18^th largest holder of bitcoin.

Bitcoin Outlook Remains Difficult

At current levels near $40,000, bitcoin’s on the week losses currently stand at slightly more than 5.0%, while on the month losses are over 12%.

Analysts have been sounding the alarm that the most recent pullback, which started on 28 March when BTC/USD failed to break above its 200-Day Moving Average just above $48,000, has more legs to run.

Fed Vice Chair Lael Brainard spoke after Tuesday’s US inflation release and her message was that while she welcomed signs of easing core price pressures, the Fed’s still plans to tighten monetary conditions rapidly this year. She spoke about getting US interest rates back to more neutral levels (2.0-2.5%) by the end of the year and kicking off a quantitative tightening programme by the end of Q2.

That means recent trends of a strengthening US dollar, higher US yields and weaker US tech/growth stock prices likely have further room to run, boding poorly for bitcoin.

Continued big purchases from the likes of the Luna Foundation Guard may cushion the selling pressure, but a return to 2022 lows in the $33,000-$35,000 area cannot be ruled out.

Below that, there is significant support in the form of mid-2021 lows in the $30,000 region.

So long as the Fed isn’t seen taking interest rates substantially higher than the currently expected by markets terminal rate of roughly 3.0% and inflation shows further signs of moderation in the coming months, hope of a return to easy monetary conditions within a few years will remain.

In this case, any short-term dip back towards $30,000 on short-term unfavourable financial conditions would likely continue to be viewed as a good buying opportunity for the long-term.