What happened with cryptocurrencies?

What happened with cryptocurrencies?

Posted May 19, 2022



The world of cryptocurrencies took a beating last week. Bitcoin price has fallen to levels not seen since 2020; Coinbase, the largest cryptocurrency exchange, saw its stock crash; and one stablecoin major called Terra, as well as its associated cryptocurrency, Luna, collapsed.

In response, cryptocurrency naysayers took to Twitter to dance to bitcoin’s grave, and subreddits that had previously been filled with celebrations of burgeoning cryptocurrency wallets were quickly overrun with people posting numbers. suicide hotlines and desperate personal stories of lost fortunes.

Part of the decline in the cryptocurrency market can be explained by the fact that they now closely follow the stock market and that the global factors that affected the S&P 500 and the Dow Jones index also affected bitcoin: another month of high inflation, interest rate hikes by the Federal Reserve, slow economic growth and supply chain disruptions due to Russia’s war on Ukraine and political China of zero covid.

But it’s impossible to understand what’s going on with bitcoin without understanding the role of Terra’s collapse and what it might say (or not) about stablecoins, which are an integral part of the crypto ecosystem. currencies.

As their name suggests, the stablecoins are non-volatile digital currencies that are pegged to the dollar. This anchoring is ostensibly “ backed by reserves like dollars, US Treasury bonds or other traditional assets”reported the New York Times last week. This peg simply means that if you use a US dollar to buy a stablecoin on Monday you can expect that, on Friday this stablecoin can still be exchanged for a dollar. Using stablecoins like USDC (USD Coin) and USDT (Tether) allows investors to get in and out of their cryptocurrency positions faster.

However, a stablecoin popular turned out not to be so stable: Terra, whose Times notes that he was based on an algorithm that encourages traders to maintain its value“, lost almost all of its value last week after its supporting sister currency, Luna, fell to 23 cents in value. (Read more about the technical side of Terra’s collapse here.) Terra’s loss of parity meant its holders couldn’t exchange their tokens for US dollars on a 1:1 basis, which is the main function of stable currencies.

The loss of Terra’s anchor not only wiped out the wealth of its investors, but also led to another stablecoin, Tether, to briefly lose its peg to the dollar and fall to 94.55 cents before recovering. The incident also caused many investors to bitcoins to pull out, lest the collapse of Terra be a sign of a systemic problem that could spread to other parts of the crypto space.

Whether the Terra incident is a harbinger of future collapses depends on who you ask.

Sam Bankman-Fried, CEO of FTX, a leading crypto exchange, said tweeted May 12:

Really, we shouldn’t use the same word for all of these things. What we call ‘algorithmic stablecoins’ are not truly stable in the same way as fiat-backed stablecoins. They are more like structured products, and they need an upside if they want to justify the risk. »

What worries Jon Stokes, founder of Ars Technica and avid Web3 watcher, is that the owners of Terra have bet everything on the project without considering the risk. He entrusts to Reason :

With the Terra-Luna couple, there was an ecosystem. It wasn’t just a stablecoin that people used on [les échanges décentralisés] to exchange USD; there was an ecosystem of DeFi products… that were built on top of that. »

Because Terra was more than just a stablecoin, “ what imploded is not just an asset, but an entire corner of web3“, says Stokes. Additionally, Terra and the associated protocol, Anchor, “ had some sort of VC imprimatur. “.

There were big names and big money behind Terra, which raises the question of whether retail investors can follow the lead of venture capitalists and other institutional investors, who can afford greater losses. important.

Additionally, Stokes notes that Terra has always been met with skepticism, not least because it was backed by volatile assets. However, Stokes says he is also skeptical of supposedly more secure stablecoins:

There’s a lot of that stuff out there; I suspect we’ll see more implosions like this in the weeks and months to come.. I think Tether is vulnerable to a bank run“.

However, another way to view Terra’s collapse is a successful stress test of Tether, which quickly regained its 1:1 peg with the US Dollar.

That’s what Nic Carter, general partner at Castle Island Ventures and founder of Coin Metrics, took away from the past two weeks, where Tether processed over $7 billion in redemptions.

According to him :

If Tether didn’t have reserves, they wouldn’t be able to do this.. What this shows is that the mechanism worked as expected“.

He adds that while many crypto critics are “ indiscriminately ” and “think everything is a scam”some things are really Ponzi scheme ” Where ” Ponzi-adjacent“. He adds that Terra meets the requirements.

As to why the bitcoin follows equities so closely, Carter explains that it is investors who are trying to manage the risk in their portfolios in these inauspicious times:

“Bitcoin is a great asset to liquidate, it sells 24/7, worldwide, everywhere.”

And finally, we could start talking about stocks following the crypto, rather than the other way around.

Bloomberg Opinion columnist Matt Levine writes:

My opinion is that… if crypto prices crash, there won’t be a ton of contagion in the rest of the financial system. But I think that’s debatable at this point. Crypto has at least started to make its way into the real financial system. Some traditional investors also own cryptocurrencies; if their cryptocurrency crashes, they may need to sell regular securities. Some public companies have exposure to crypto (because they’re crypto exchanges, because they have leveraged crypto holdings, etc.), so your boring old index fund might go down when crypto goes down. »

The existence of ripple effects would prove the success of crypto, in a way, argues Levine.

Despite the current volatility in the crypto space, its fundamental promises hold firm.

Carter adds:

It remains a competitor for central banks. It is very clear to me that bitcoin in particular and then stablecoins are very useful for financial and monetary freedom. »

On the Web

Translation Justine Colinet for Counterpoints

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