Terra Foundation adds $230 million bitcoin to its reserves to back its stablecoin

• Terraform Labs founder and CEO Do Kwon said the company had added 5,000 bitcoin in a tweet on Wednesday.

• Its bitcoin reserve is now worth $1.6 billion with a goal of reaching $10 billion to back its terraUSD stablecoin.

• Terra's luna token hit a record high of around $119 last week, but has since eased back to $110.

Terraform Labs founder and chief executive Do Kwon said on Wednesday he had purchased $230 million worth of bitcoin through the Luna Foundation Guard, with the aim of adding it to the company's bitcoin reserves.

"Today I watered my plant, wrote some emails, bought 230M in bitcoin, vacuumed the house, had some mcdonalds, now off to walk the dog," Do Kwon said on Twitter.

The purchase was made to add to Terraform Labs' reserves through its non-profit organization Luna Foundation Group as part of the backing for its terraUSD stablecoin. Last month, Kwon said terraUSD would be backed by at least $10 billion worth of bitcoin, among other assets.

Stablecoins are digital currencies pegged to assets such as the US dollar, which have experienced a rise in popularity over the past year, as they represent a more stable investment than other more volatile cryptocurrencies.

TerraUSD is the fourth largest stablecoin by market value behind tether, USDC and Binance USD, according to CoinMarket Cap. Unlike most dollar-backed stablecoins, terraUSD is not backed by the US currency.

"Terra's family of stablecoins is maintained through a system of arbitrage incentives, open market operations, and dynamic protocol levers that maintain robust peg stability and scalability of its supply without the centralized control or capital-inefficient designs of incumbents," according to the Luna Foundation Guard website.

TerraUSD is an algorithmic stablecoin, which it uses a swap mechanism that keeps its value pegged at $1. The algorithm destroys, or burns, luna tokens in order to create new terraUSD tokens. So any luna holder can swap $1 worth of luna to $1 terraUSD. This makes luna tokens more scarce and terraUSD less scarce, so that the value of terraUSD always end up back at $1. If terraUSD falls below $1, the opposite happens, meaning more luna tokens and less terraUSD supply, which then brings the value back up to $1.

Wednesday's purchase brings the value of Terraform Labs' bitcoin holdings to $1.6 billion, part of the way towards its target of $10 billion.

Terraform's luna token hit an all-time high of almost $119 last week, according to CoinMarketCap data, while it has since retreated from these highs the coin is still up 4.34% over the past seven days, trading at $109.67.

©yahoofinance. Copyright and all rights therein are retained by authors.