What can we learn from the latest crypto crisis?
The past few weeks have not been kind to most crypto investors. In this week’s Tech Travels, Ian Horne explores what’s happened and what it means for cryptoassets and personal finance.
Cryptoassets appeared to be in a good place just a few weeks ago. The Treasury announced that it would be placing serious focus on the market, with stablecoins and crypto sprints among their priorities. However, as I write this, crypto markets have just sustained significant losses.
These losses, regardless of what the memes might say, could make a hardened crypto investor blush. Bitcoin, the most valuable cryptocurrency in circulation, is now worth less than £24,000 per coin, down almost 25% on where it was last month. The entire crypto market cap, according to CoinMarketCap, now sits at $1.28tn (£1tn). Towards the end of last year it had been north of $2.8tn.
Explaining why crypto markets go up or down can feel like a mug’s game. Markets might be reacting to interest rate rises or, just as easily, a celebrity tweet (thanks, Elon). However, on this occasion we can easily identify an incident that has dented confidence in the market, and it is an incident on the Terra blockchain involving the TerraUSD (UST) stablecoin and its partner coin Luna, which was designed to keep UST pegged to the dollar.
What happened?
This incident is well documented, and for those wanting a fuller description of events I would recommend this article on Time.com, but for the sake of keeping things snappy here is the briefest of overviews of what happened:
The UST stablecoin and Luna, which both exist on the Terra blockchain, suffered monumental losses this month. This happened as UST lost its peg to the dollar, potentially due to short-sellers.
As UST depegged from the dollar, investors (or speculators, if you prefer) wasted little time withdrawing their funds. This triggered a crash in Luna, a coin that was supposed to maintain the value of UST via an algorithm, and both UST and Luna entered a death spiral. UST is now worth slightly less than nine cents, and Luna, once worth £88 per coin, is now worth fractions of a penny.
What has occurred, to put it simply, is the failure of an algorithmic stablecoin. This might not be so notable were it not for the scale of the losses. As Bruno Maçães observes in The New Statesman, $41 billion was wiped out when UST collapsed. Lehman Brothers had been valued at $60bn before its demise in 2008. This was a blowout, and it also happened to a coin that had been one of the top 10 coins in the crypto market.
The industry has been set back by years
What can be learned from this gut punch, which took roughly £500bn off the global crypto market cap? (this figure is prone to wild swings) I asked Katharine Wooller, UK managing director at crypto wealth platform Dacxi.
‘The course of events is a huge blow to the crypto industry,’ she says. ‘A top 10 coin with heavyweight institutional investors collapsing by 99.999% has set back the industry, as a whole, by a number of years and caused a heavy correction across most other coins.’
‘Few saw it coming. Terraform labs [who created the Terra blockchain] had some serious backing; more than $200m raised from firms such as Lightspeed Venture Partners, Galaxy Digital and Pantera Capital, who of course had cashed out the majority of its Luna holdings prior to the crash.’
Another issue to raise here, which was alluded to earlier, is the nature of the UST stablecoin. UST was designed to serve two main functions. Firstly, to provide investors a safe harbour from volatile moments in crypto markets, which are commonplace. Secondly, to allow conversions from other coins in a manner that is cheaper and more tax efficient than switching to cash. However, rather than being backed by a reserve currency, the dollar peg was supposedly maintained by an algorithmic link to Luna. This did not pan out as planned.
Read the full article: https://citywire.com/wealth-manager/news/what-can-we-learn-from-the-latest-crypto-crisis/a2388028?ref=wealth-manager-new-latest-news-test1-list
