Bitcoin investors are panicking as a controversial crypto experiment unravels

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Investors in bitcoin are in panic mode as the controversial terraUSD stablecoin slips further from its intended $1 peg.

TerraUSD, or UST, sank below 70 cents for the first time late Monday, as holders continued to flee the token in what some have described as a «bank run.» The token fell as low as 62 cents before regaining ground to trade at 90 cents Tuesday, according to Coinbase data.

Created by Singapore-based Terraform Labs in 2018, UST is what's known as an «algorithmic» stablecoin. Part of the Terra blockchain project, it's meant to track the value of the dollar, like fellow stablecoins tether and USDC.

However, unlike with those cryptocurrencies, Terra doesn't have cash and other assets held in a reserve to back its token. Instead, it uses a complex mix of code — alongside a sister token called luna — to stabilize prices.

It's important for bitcoin investors as Luna Foundation Guard, an organization supporting the Terra project, is sitting on billions of dollars in bitcoin that could potentially be dumped onto the market at any point.

"Every professional investor in crypto has one eye on UST today, watching to see if it can maintain its peg to the dollar," said Matt Hougan, chief investment officer at Bitwise Asset Management. «There's clearly significant risk in the market.»

In simple terms, the Terra protocol destroys and creates new units of UST and luna to adjust supply. When the price of UST falls below the dollar, it can be taken out of circulation and exchanged for luna, making UST's supply more scarce and boosting its price — at least, that's how it should work in theory.

To further complicate things, Terra's creator Do Kwon bought $3.5 billion worth of bitcoin to provide a backstop for UST