If Logan Paul’s recent venture into the metaverse isn’t explanation enough for you, there may be another malignant influence on the current bear market. (If it gets El Prof to say the words, ‘Elizabeth Warren was right‘, I assume it must be major.)
Terra, the 3rd most popular stablecoin and 10th most popular crypto token by trading volume, got depegged from the fiat dollar yesterday for the second time in 48 hours. For a highly technical and detailed explanation of what that pile of word vomit means, read this. For our legally-not-financial-advice and probably totally inaccurate hot take, read on.
Terra is an algorithmic stablecoin, which basically means an automated system is constantly buying and selling from a money market account to keep the value of one Terra coin ‘pegged’ — or equivalent — to one U.S. dollar. For the length of the project up until now, said account amounted to little more than a large cash reserve, buoyed by a sister token, LUNA, the price of which crashed by 44% in the wake of the depeg. But, as of yesterday, the Luna Foundation Guard, the organization behind the coin, is loaning out $1.5B of its Bitcoin reserves to support the peg.
If you want the specifics of how and/or why, I’ll refer you again to the afore-linked guy who actually knows what he’s talking about. But the gist is, Bitcoin has a value related to the dollar, so if you’re pegging the value of your coin on a set amount of BTC and the dollar value changes, you have to buy or sell to match. Unfortunately, this delicate balancing act is being handled by an algorithm that already buckled under the weight of the USD’s volatility. BTC is, in the understatement of the century, a little more volatile.
We have three takeaways.
First, with such a massive market force going all in on Bitcoin over Ethereum, we expect the price of the former to rise and the latter to fall long term, in the wake of this market signal that, of the two, Ethereum is the less reliable.
Second, we expect the so-called stablecoin to only exhibit more depegging from here on out. Pegging a coin’s value to your own reserve is all well and good, but, at the end of the day, you only have as much money as you have. When your reserve’s value is above the coin’s, you have a cushion, sure. But when it’s below, you will always need a cash infusion to go buy more. Call it a business, a bank, or a DAO, it doesn’t matter. I know an unsustainable model when I see one.
And third, we’re fortunate to have such a precognizant CEO in our own Kevaughn, who was looking into ways to short the Terra market two weeks ago. Unfortunately, DeFi is still a casino economy (remember, they’re literally called tokens) and so most of the actually actionable parts of the real economy haven’t yet made it to crypto. But, stick with us and rest assured, even if we only impart wisdom with no tangible value, at least you can look smugly upon the masses and say, I told you so.
