Forty Billion Dollars Stopped Existing in Four Days

There is an old Skittles commercial still sitting on YouTube. Three teenagers eat candy on a rainbow. One of them asks what happens if the rainbow isn’t real — if it’s only imagination.

The rainbow opens. He falls. The others keep sitting. The line at the end is simple: believe the rainbow.

TBWA\Chiat\Day, the advertising agency that produced the commercial made it to sell candy, but the ending still gets cited on its own, for the moment the boy who doubts falls through.

Cryptocurrency works like that rainbow. A coin is an agreement among a lot of people, plus a public record of who owns how much. It buys a house, a pizza, a ticket out, for as long as enough people keep treating it as money. Underneath the price charts and the technical documents, all that holds it up is people agreeing. If they stop agreeing, the number on the screen is still there, but it no longer buys anything.

In May 2022, a coin called TerraUSD was supposed to always be worth exactly a dollar. It had no vault of cash behind it. Behind it was a second coin, Luna, and a computer program that automatically created more Luna whenever people sold TerraUSD, to keep the price at one dollar. On a Saturday evening, enough people sold at once that the price slipped below a dollar, and the program did exactly what it was built to do: it created more Luna to hold the price up. That only meant more and more Luna, while fewer and fewer people believed any of it was worth something. Luna went from around eighty dollars to a fraction of a cent in four days. Something close to forty billion dollars stopped existing. Nobody stole it and nobody burned it; people just stopped believing it was there. In South Korea alone, close to 280,000 people saw that loss in their own accounts. The rescue program had only ever worked because people trusted it. Once that trust was gone, creating more of the coin just made it worthless faster.

Counterfeit money does its worst damage the same way, and Terra did it without a single fake bill: once one kind of money turns out to be worth nothing, everyone nearby starts to wonder whether theirs is too. Terra’s fall spooked people holding coins that had nothing to do with Terra — the wider crypto market kept sliding for weeks. Old-fashioned bank runs work the same way. Terra’s collapse was a bank run with no bank teller to slow anyone down.

The Skittles commercial ends with a dare: keep believing, or you can’t stay on the rainbow. Crypto never says it out loud. Every few years the market tests everyone's belief at once, in public. The program never malfunctioned, on the way up or on the way down; it did what it was built to do. It could only ever hold up as many people as believed in it.

The candy ad was selling sugar. TerraUSD was selling forty billion dollars’ worth of the promise that it would hold, until one Saturday evening not enough people believed it anymore.