My friends, if you count yourself a crypto investor though you've only entered the market in the past year or so, shelled out some money on some dough and are now relaxed waiting for your project to moon because you missed out on the DOGE and SHIBA bull runs, but you think your stars are aligned this time and you're gonna make it, you don't want to go to bed at night and wake up in the morning to check cryptocurrency prices only to see this guy, right?
I sure don't.
But he's just been popping up over and over again this week, and he's got investors spooked.
Quick question, my friends, were you one of those investors who's been shaking the table over at Terra?
You didn't have Bloomberg reporters pulling out their pens to write clever alliterations about Terra's audacious algorithms, right? I'd hope not. Because we're mature over here. We know how to sit still and wait out a storm, right? Even if that storm is a class five hurricane.
But let's discuss Terra for a bit.
Terra’s UST fails to recover dollar peg, LUNA plummets
Until recently, popular blockchain protocol, Terra was one of the golden boys of cryptocurrency, and the projects in its ecosystem were highly favored. And I mean this story has been all over the news these past couple days, but if you haven't heard of what happened, Terra's algorithmic stablecoin UST lost its dollar peg after plummeting prices rocked investor confidence leading to a bank run on Terra’s popular yield generating protocol, Anchor.
As CNBC explains, "Created by Singapore-based Terraform Labs in 2018, UST is what’s known as an “algorithmic” stablecoin. Part of the Terra blockchain project, it’s meant to track the value of the dollar, like fellow stablecoins Tether and USDC." Well, all of that ended when the UST lost its dollar peg, a position it has not been able to reclaim even after the Luna Foundation Guard pledged to lend $750 million worth of bitcoin to help protect the UST peg.
At the time of this article, it was trading at approximately $0.79. Meanwhile LUNA lost near 72% at the time of this post, plummeting harder even than FTM did when developer Andre Cronje announced his departure. Ouch!
In its article, Bloomberg notes, "There are around 18.5 billion of UST in circulation, according to CoinMarketCap, a big enough presence that its swings could have systemic implications for other coins and protocols."
This is certainly an evolving situation to monitor, guys.
In the midst of these developments, the US Federal Reserve has issued its Financial Stability Report dated May 2022 providing an assessment on the resilience of the US financial system and including in that report its views on the vulnerability of private stablecoins pegged to the US dollar.
In the report, it noted that the aggregate value of stablecoin had grown to more than $180 billion in March 2022 with the much of the sector’s funding concentrated with Tether, USD Coin and Binance USD constituting more than 80 percent of the total value. It should be noted though that by May 2022, they were identifying the algorithmic stablecoin UST as the third largest stablecoin by market cap.
The Federal Reserve’s report stated, “Stablecoins typically aim to be convertible, at par, to dollars, but they are backed by assets that may lose value or become illiquid during stress; hence, they face redemption risks similar to those of prime and tax-exempt MMFs.
“These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins. Additionally, the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”
And so, my friends, as I leave for the day, I have a question for you: how have you been managing your exposure in this bear market?
