The death spiral we had to have
I wrote my first story about Bitcoin in 2011. In the 11 years since, I’ve spent a lot of time reading, writing and thinking about cryptocurrency.
So, trust me when I say that the rapid-fire implosion of the LUNA-UST ecosystem is one of the top five most consequential events I’ve ever witnessed in crypto. In the space of 48 hours, roughly US$45 billion of notional value simply disappeared. The Luna Foundation Guard, proud buyers of US$3 billion of Bitcoin last month as “insurance”, were forced to basically sell it all in a failed effort to save the chain.
In effect it wasn’t entirely dissimilar to George Soros’ infamous attack on the British pound in 1992. However, the British pound is backed by, well, Britain, whereas LUNA was backed by an algorithm that responded to negative pressure with a burst of hyper-hyperinflation to put Zimbabwe to shame.
And now you have a worthless stablecoin backed by a worthless blockchain and a convenient narrative for every regulator and crypto skeptic to confirm their long-simmering suspicions about the space. Thanks Do Kwon!
Cleaning out the stables
The UST fiasco has shone the spotlight squarely on the stablecoins that fuel the crypto market. With numerous UST clones out there – Near, Fantom and Tron all recently got in on the action – enterprising whales began wondering if they too could destroy a blockchain.
While there haven’t been any casualties so far, many stables have temporarily lost their pegs, either in the face of concerted attack, or simply from investors getting the hell out of Dodge.
Tether, the largest stablecoin, was not immune, despite being a fully collateralized (as opposed to algorithmic) stablecoin. Long the subject of rumours and accusation as to the accuracy of their accounts, the price of one USDT dropped to 95 US cents as skittish holders sought safer refuge.
While that depegging was largely a market effect, there has been real world follow through. Over the last week Tether has redeemed US$9 billion in USDT tokens for USD, the first significant redemption since late 2018, when USDT shed about 30% of its market cap.
As a general rule, stablecoin issuance functions as a proxy for market enthusiasm. Over the last two years, Tether’s market cap has gone 20x. With the markets shaky and the mood dismal, it’s unsurprising to see some of that money flowing elsewhere.
Hello darkness, my old friend
The Fear & Greed index has, unsurprisingly, been hitting some historic lows. We are terrified – and not without cause. The macroeconomic picture is grim. Hacks and collapses have become endemic. Bitcoin just printed its 7th straight negative week, something that has never happened before. Like in 2018, the question is being asked: has crypto’s value overshot its usefulness?
If this is a new crypto winter, here are three things we know:
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