What’s behind LUNA Rally, could its price decouple from Bitcoin?


LUNA price is moving on its own as the crypto market trends lower. Terra’s native cryptocurrency posted a 6.4% profit last week as BTC, ETH and BNB traded sideways.

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At the time of writing, LUNA is trading at $89.35 with a loss of 4.8% in the last 24 hours. Despite recent losses, the cryptocurrency is rapidly climbing into the top 10 cryptos by market. Currently, it sits in 7th position after pushing Cardano (ADA), Solana (SOL) and Polkadot (DOT).

LUNA is trending higher on the daily chart. Source: LUNAUSDT Tradingview

A report by economist Murray Rudd attempts to demonstrate a potential decoupling between Bitcoin (BTC) and Terra (LUNA). The number one cryptocurrency has a strong dominance over the entire market.

Therefore, it is common for altcoins to trend lower or higher, to move in tandem, with the price action of BTC. Recently the price of LUNA has started to move away from this pattern, sometimes it tends to move in its own direction regardless of Bitcoin.

In order to support this thesis, Rudd looked at the performance of LUNA/BTC over different time frames and with different metrics. The economist has represented the performance of this trading pair with different correlation zones.

As seen below, the green area represents high correlation, while the red to white area represents periods when LUNA is uncorrelated (red) or shows low correlation (white) with BTC. Based on this table, Rudd noted:

The degree of positive correlation appears to have decreased in duration and intensity (i.e. more time spent in the weak positive correlation zone compared to the strong correlation) from August 2021.

Luna LUNABTC Terra
Source: Murray Rudd via Substack

Additionally, looking at the LUNA/BTC correlation over a 30-day period from January 2020 to January 2021, the economist found times when the metric moved with more visibility.

For example, the chart below shows a drop in correlation for the trading pair during the fourth quarter of 2020, when BTC started to rise to new highs. Conversely, the chart indicates that LUNA tends to move on its own, at least during this period, after a long period of BTC price consolidation.

Source: Murray Rudd via Substack

Luna decoupling, what it means for future price action

The economist also determined a first major period of uncorrelated prices for the LUNA/BTC trading pair in the spring of 2021. At this time, the crypto market reached a local high exceeding $2 trillion in terms of capitalization.

Throughout 2021, Terra’s native asset will experience further uncorrelated or low-correlation periods. When the crypto market started to rebound after a long period of falling prices, in the summer of 2021, the LUNA/BTC trading pair “suddenly went from positive correlation to non-correlation.”

In September 2021 and December 2021, LUNA experiences similar events. At that time, the ecosystem was discussing several major improvements to its mainnet and the implementation of a burning mechanism for LUNA.

These updates and new mechanics of the Terra ecosystem have been live for a short time. Over time, they could contribute to the complete decoupling of LUNA from Bitcoin and the crypto market. Currently, Rudd thinks this event may never happen, but he added:

The LUNA price is not (and likely will not be) completely decoupled from the BTC price. This indicator cannot be used to predict future correlation movements but it has definitely shown a significant decoupling of LUNA and Bitcoin prices since the summer of 2021.

Uncorrelated assets are potentially valuable to investors as they could become a hedge against broader industry trends. In a bear market, investors could protect their wealth by jumping into a LUNA position or using its UST stablecoin.

Related Reading | Terra (LUNA) Outperforms Popular Cryptos Ether, Dogecoin in Last 24 Hours

The increase in demand for this decentralized stablecoin, and its impact on the price of LUNA, is another reason that could further strengthen the long-term bullish thesis for the Terra ecosystem.