anchor protocol

ANC price risks becoming overheated, however, after a major rally.

Anchor Protocol (ANC), the decentralized finance (DeFi) platform built on the Terra blockchain protocol, rebounded nearly 300% in over a month after bottoming out near $1.26.

ANC price went as high as $4.97 on the Bitfinex cryptocurrency exchange on March 3, 2022, breaking above the previous record peak near $4.50 established on Dec. 3 last year.

In doing so, the Anchor Protocol also erased all the losses it had incurred during what some called the "crypto winter" that started in Q4/2021 — against the prospects of the Federal Reserve's aggressive rate hikes.

ANC is the governance token of the Anchor Protocol's decentralized money market that offers UST (Terra's dollar-pegged stablecoin) depositors a stable 20% annual percentage yield (APY). In addition, it enables borrowers to collateralize UST loans using bonded LUNA (bLUNA).

Funded. pic.twitter.com/NLvnSa0bBu

— Do Kwon (@stablekwon) February 18, 2022

As a result, the Anchor Protocol creates demand for UST, which, in turn, promises to remove more LUNA tokens out of circulation. That is due to Terra's economic model, which incentivizes users to mint UST when its value goes above $1 by burning LUNA supply.

Terra correlation

ANC's upside retracement in January 2022 started primarily in the wake of similar price recoveries across the crypto market but picked up momentum at the end of February while mirroring bullish moves in the Terra (LUNA) market.

Notably, the correlation coefficient between ANC and LUNA rose from zero on Feb. 23 to 0.91 on March 3, meaning Anchor Protocol's price has been more or less mirroring the moves of the Terra blockchain's native token.

As Cointelegraph covered earlier, the upside boom in the Terra market emerged after Luna Foundation Guard (LFG) — a nonprofit organization supporting its blockchain ecosystem, raised $1 billion in a LUNA token sale round to create a so-called "UST Forex Reserve."

In response, LUNA's price rallied by nearly 90%. ANC also surged under LUNA's impression, mostly due to its involvement in the Terra ecosystem. The price of MIR, the native token of another Terra-based project, Mirror Protocol, was also up 30% on March 3 when measured from its Feb. 24 low of circa $1.

Is ANC overheated?

The latest period of buying in the Anchor Protocol market has made ANC excessively valued, according to a key momentum indicator.

The readings on the ANC's daily relative strength index (RSI) came out to be near 80, which makes the token technically "overbought." Traders typically find opening new upside positions extremely risky when the RSI crosses above 70. Conversely, they prefer to sell the asset to secure interim profits.

Related: Rune’s upcoming mainnet launch and Terra (LUNA) integration set off a 74% rally

If a selloff ensues, the Anchor Protocol's next support level appears near $4, coinciding with the 1.0 Fib line of the Fibonacci retracement graph made from $1-swing high to $1.26-swing low. Meanwhile, an additional decline could bring ANC's 20-day exponential moving average (20-day EMA; the green wave) near $3.14 in focus as the next downside target.

More downside could bring ANC's 20-day exponential moving average (20-day EMA; the green wave) near $3.14 in focus as the next downside target.

Conversely, further upside could have ANC bulls target $5.50 as their next resistance level.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.