I discuss the Luna/USD meltdown and the general market downturn in the context of the broader market.
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Well, it’s Friday the 13th, this time for another this week in crypto. Dave Weisberger, CEO of coin routes. And it’s been a hell of a week. And weirdly, even though it’s Friday the 13th, there’s less scary stuff going on today than we’ve seen certainly on Wednesday of this week. So there’s two crosscurrents that are going on in the crypto markets.
One is within a backdrop of very weak performance overall for risk assets, although today there is a significant relief rally again in the nasdaq. Correlation to bitcoin remains high, and correlation to crypto remains high. So with that backdrop, where we talked about that the fed raising rates, causing people to take all their risk assets off has definitely been a drag on the crypto market. But the big news this week and what we need to talk about is the collapse of the terra luna ecosystem. Now, this is potentially and will probably be a seminal event in crypto. Maybe not quite on the scale of Mount Gox was for bitcoin, but certainly in the same zip code. What happened? Well, the terra ust stablecoin was “pegged to the dollar”, and everybody believed that it was safe. It was a new type of algorithm.
They used a burn mechanism with luna where if, in fact, terra started to fall, they would be able to sell luna, and it started to rise, they’d be able to buy it and manage to keep everything stable. The problem with this is it is not, never was a true stable coin. The notion of an algorithmic stablecoin is really an oxymoron. Algorithms that can be used to stabilize the price of instruments are well understood. How every underwriter uses something called a green shoe to be able to stabilize the price. So they can either buy more or they can sell into it so that things don’t necessarily move. Stabilization is something that codifying into an algorithm is not magic. I actually made the analogy this week, and I think it’s probably fair that UST is probably best compared to dollar peg currencies. Now, if you remember back in the 1990s, and if you’re as old as me, you will. And if not, you probably read about in the history book, there was something called an Asian contagion.
So if you look at, like, one of the currencies was the Malaysian ring, it was pegged to the dollar. What happened? Well, capital flights started, and as a result, the Malaysian government had to literally impose capital controls to stop people from selling their currency. And eventually they ended up dissolving the peg to the dollar. Well, if you look at UST, what you have is a situation where the capital outflows became too large for the ecosystem to handle it. And since they didn’t have the ability to implement capital controls, luna got inflated to the point of trillions of freely floating coins. And today it’s essentially valuable. It’s well, less than a penny. I think it was the last I checked, it’s certainly way under a dollar and it’s basically more of them. The blockchain had to stop.
So that situation is a big deal you’re talking about combined between UST and Luna, over $50 billion of value wiped. Now, the difference between this and some of the other rug pools like Titan last year, is mostly in the quality of the people who are supporting it. Some of the biggest names in crypto were supporters of Luna. Some of the most followed and respected names in the industry. So when you have a situation like that, it’s going to be a drag on confidence.
I would expect that the risk premium of crypto assets to be significantly depressed for a fairly long period of time as people digest what happened. Now, eventually, however, the market is a discounting mechanism. There are protocols out there which don’t have this sort of tail risk, which will rise to the top and as it gains adoption and the use cases become useful, will start to rally. Notice I haven’t mentioned Bitcoin in any of this, and there’s a reason for that. During this market meltdown, during this catastrophic loss of Luna and significant drawdowns in many other currencies, bitcoin has more or less trapped in Nasdaq.
It is right now once again flirting with the 30,000 level. It fell as low as 25 and change earlier this week. But the truth is it still hasn’t violated, except for that one brief point. It’s trading range that’s been carved out for the last eight months, depending on one way of looking at it, 14 another way of looking at it. The reality is it’s still in that trading range. The reality that we’ve said all along is that bitcoin seems to be following a pattern where there’s longterm accumulators at these levels that will not FOMO chase when there’s a rally. So the rallies peter out and comes back down toward these levels. This type of buyer does not stand with a buy wall at a bid. They wait for it to move and they move with the market. But there’s a lot of buying interest.
That’s basically what we’re seeing. How long will this last? I don’t know. As I said last week, I expect Bitcoin to more or less track risk assets until there will be a de-linking as we start to get an idea of what the Federal reserve is going to do next. But it is important for our viewers to understand that that is not true with the rest of the crypto market, other coins are going to feel the pain of what happened here, even if it’s only the fact that investment committees are going to declare risk to be high in protocols that they don’t understand.
So expect to see a flight to “quality”, where quality are protocols and use cases that are better understood and where other use cases that are less well understood or potentially just yield chasing will suffer for some period of time. Just one man’s opinion. Please do your own research. But that’s what we’re seeing in the market. Meanwhile, as volatility continues to be high, volumes are healthy and people are trading around positions and making the best of what has been an undeniably difficult situation. That’s all I have to say for this week. Stay safe out there. Thank you.