A $40 Billion Fiasco
A $40 Billion Fiasco
This Week in Bitcoin - May 15, 2022
$30k Test
Bitcoin is testing $30,000.
Long term support is front and center and “technically” it broke (but not for long). BTC dipped for a period of a few hours to prices below $27,000 on May 12.
Last week, traditional markets sold off… again. What has been an extremely volatile year in financial markets continued into the second week of May.
The tech-heavy Nasdaq is now down 25% on the year.
In my April crypto report, I highlighted the fact that the Nasdaq recorded its worst month since 2008. While bitcoin and crypto have broken away from traditional markets at times, they’re still more correlated than not.
In the simplest sense, the more mainstream crypto goes, the more exposure investors have across all asset classes, crypto included. So, if traditional markets are suffering, crypto investors are going to feel the pain and their crypto holdings may suffer in tandem.
Something else happened that’s impacting the markets and we have to talk about it.
$LUNAcy
It’s unavoidable.
We have to talk about luna.
Or, UST.
Or, both.
And… Do Kwon and his now infamous $LUNAtics.
If you don’t know what I’m talking about, here’s a quick breakdown.
Terra is a cryptocurrency project.
It’s a blockchain-based “ecosystem” that claimed to power price-stable global payments systems. The thing is though, the terra ecosystem just imploded, shedding upwards of $40 billion in a matter of days.
As broader crypto markets struggled alongside traditional markets and surging inflation, a massive cryptocurrency project failed. The terra collapse served to add insult to injury amidst what was already a volatile week.
Terra
Terra consists of a native crypto token called luna and a stablecoin called UST or TerraUSD. Luna acts like most cryptocurrencies. It’s an altcoin, traded and held by users for both governance purposes within the terra blockchain and for pure speculative trading.
UST is a stablecoin. Or, at least it was until it became the exact opposite of stable last week. UST is supposed to be pegged to $1 per token.
Stablecoins
Stablecoins are becoming more common in crypto today. They’re a way to provide liquidity to users and exchanges trading in and out of cryptocurrencies without having to cash out to dollars during the process.
For example: say you own some ether. You want to sell it but you don’t want to cash it out to dollars via your bank. Instead, you sell the ether for a stablecoin that holds its dollar-equivalent in value and you keep that stablecoin, like cash, on a cryptocurrency exchange in case you want to buy back into ether or another crypto at a later point in time.
Stablecoins allow crypto users and brokers to keep money sidelined within the crypto ecosystem. There are many different stablecoins and they all have different ways of sustaining their dollar parity. Some are backed by dollars and dollar-equivalent assets.
The main problem with terra’s UST is that it was never fully collateralized. It was backed by some bitcoin but not enough. It was also an algorithmic stablecoin, meaning that part of its dollar parity was based on a complex system of burning luna tokens in order to create UST tokens and vice versa.
I know, this is a lot.
What Happened?
1 UST token is supposed to equal $1. As of writing, 1 UST is now worth $0.1814. That’s because the $1 peg failed and, with it, so did the entire terra ecosystem.
As UST plummeted, so did its partner token luna. The price of luna fell from highs near $120 in early April to prices near $0.0002647 as of Sunday.
Billions wiped off the table.
And it’s all because the project was (more of less) too good to be true. Impossible promises of 20% interest on UST stablecoin holdings, arbitrage trading by some of the largest terra whales in the game, and a founder whose entire project was revealed to be based on a prior failed attempt at a crypto scheme are just a few of the reasons why the terra implosion occurred.
So many holders suffered.
The broader markets suffered.
And when it’s all said and done, we’re going to be left picking up the pieces and trying to promote learning so this doesn’t happen again.
If it acts like a duck…
Investing in altcoins requires scrutiny. Unfortunately for investors, you don’t always know whether or not what you’re reading about a project is the truth.
We saw the 2017 ICO bubble burst when countless altcoins collapsed or disappeared. They were revealed to be, at worst, scams and, at best, weak projects that couldn’t scale or that were too heavily reliant upon individual founders. Terra is shaping up to be something in both of these camps and it’s really sad to see.
Terra’s founder tried to create a stablecoin project in 2018 that failed amid regulatory concerns. This wasn’t widely known until this month though.
While it’s impossible to have all the facts ahead of investing in or even just coming to an opinion on a cryptocurrency project, you can try your best at some due diligence. I’ve never held UST or luna but I know people who have (and who still do).
I generally prefer bitcoin to any type of altcoin project, especially those whose roadmaps are heavily dependent upon one or a handful of individual decision-makers. But, there are some basic insights we can glean from terra in the immediate aftermath.
2 Immediate Takeaways
20% yield might be too good to be true
not your keys, not your coins
These are the simplest takeaways I have for now. There’s a lot of cryptocurrency exchanges, wallets, and platforms that offer interest on your holdings. Heck, I even hold ethereum on crypto dot com in order to earn interest.
That said, the 20% interest yield that people were getting from UST is a really high number. Crypto interest rates have gone down over time. Stablecoins tend to still have higher interest rates than other crypto tokens but even those have decreased.
If you’re going to lock up your crypto for staking or in another interest-bearing account, it’s best to understand as much about that process as possible. Understand the risks that come with doing so, the biggest of which goes back to the age-old saying in bitcoin and crypto: not your keys, not your coins.
Cryptocurrency held on an exchange is not your cryptocurrency. That crypto is held and technically owned by the exchange. The same goes for any wallet or platform where you, the individual, are not the sole holder of the seed phrase (otherwise known as private keys) to said crypto holdings.
If your crypto is earning interest with a third party, that third party could be doing all sorts of things with it on the backend in terms of lending and trading and you have no control over any of it.
Best Practice
Self-custody is best practice.
That means holding your crypto in a way where you, and only you, can access it. You can buy crypto on an exchange. That’s often the easiest way to do it but it’s always best practice to then send it to a cold storage wallet where you hold your keys.
Conclusion
Okay, terra aside, let’s talk bitcoin.
The terra situation will continue to unfold and likely negatively impact bitcoin BUT on top of that and traditional markets continuing to sell off, bitcoin has held up relatively well. Yes, $30,000 broke but it was brief. Bitcoin rebounded and appears to be testing $30k with everything it’s got.
Is the bottom in? People are split.
Bitcoin closed three straight days below $30k. Once at $28,900 and twice above $29,000. Then, it closed above $30,000 and yesterday it closed above $31,000.
For now, I consider that as long term support holding. A deeper break below current levels beyond $24,000 would signal larger bearish trends but for now, I’m watching daily closes with a careful eye, wanting to see as many closes above $30,000 as possible.
Long term, nothing changes.
Bitcoin’s value proposition is more true today than it was last week. Chaos in altcoin markets is reason to reconsider why bitcoin matters.
Bitcoin’s a difficult to change piece of technology that is controlled by no one. It enables more decentralized and global participation than any other cryptocurrency project in existence. It’s monetary policies and core protocols are known to all.
When you hold bitcoin privately or maybe even mine it, you realize the true power behind it. Bitcoin is a hard asset that can be secured and sent across time and space for generations to come in near pristine condition.
Not all crypto is created equal. Bitcoin is crypto but most crypto is not bitcoin. As we watch the terra situation unfold, this is important to remember.
Keep an eye on traditional markets as we open this week. Continued selling pressure could keep bitcoin in a consolidation range near $30,000. If things intensify, we could test long term support even further.
See you next week!
$30,257.14—BTC Today
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I am not an investment or financial advisor. All opinions expressed are mine alone. Read the full DISCLAIMER on the About page.
I hope that Bitcoin will recover.its sad to see how Terra going down of zero