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What the Bleep is Happening With Terra, UST, and Bitcoin

Just when it looked like Bitcoin (BTC-USD) was going to churn sideways for a while – it crashed 15%, instead…and took a lot of other crypto prices down with it. Let’s take a look at the domino effect that happened here – and what it says about where we go next!

man in glasses holding a coin that has the Bitcoin (BTC-USD) logo
Source: Shutterstock

An “Algorithmic Margin Call” at Terra

Remember when Terra (LUNA-USD) bought a bunch of bitcoin to back its stablecoin, TerraUSD (UST-USD)?

It was a pretty cool experiment: Build a crypto (UST) that’s pegged to the U.S. dollar automatically – with an algorithm that rewards Terra’s investors (in LUNA) along the way. Then, when people complain that a stablecoin needs to be backed by more than just an algorithm… Start building a reserve of BTC! After all, bitcoin is “a completely auditable, transparent and decentralized digital asset,” as CoinDesk’s George Kaloudis noted at the time.

The only problem – as we’ve been painfully experiencing these last couple days – is that if the algorithm fails to maintain the dollar peg… You’ve got to dip into those bitcoin reserves to try and fix it.

And yesterday, the Luna Foundation Guard sold all 42,530 of its BTC. That’s $1.3 billion worth of selling pressure…in one fell swoop! All from what was “essentially an algorithmic margin call,” as one analyst put it in TechCrunch yesterday.

Mika Honkasalo, a crypto researcher affiliated with The Block, had been watching the on-chain data all weekend as TerraUSD began to struggle. And as he recounted on The Scoop podcast this morning, Honkasalo “immediately started to see a bit of a different story than just low liquidity and a sudden price move” – which is usually what goes wrong with stablecoins. Instead, he saw “lots of large selling of UST into other stablecoins… The structure of the market had become a lot more averse to UST than it previously had.

“I think what you’re seeing today is that just sort of escalating and going further,” Honkasalo concludes. Not only has the UST stablecoin failed to maintain parity with the U.S. dollar – at one point, it was more like $0.60! – the LUNA crypto has gone from $60 to $30 in one day. Finally, Terra/Luna’s mercurial founder, Do Kwon, has popped up to tweet that he’s “close to announcing a recovery plan for UST.”

Yellen Calls for Stablecoin Regulation This Year

Meanwhile, the whole debacle of not-so-stable stablecoins – just when crypto investors might want them the most – has attracted the lady in charge of the actual U.S. dollar: Treasury Secretary Janet Yellen.

Yellen testified to the Senate Banking Committee today that the “bank run” on TerraUSD “illustrates that this is a rapidly growing product and there are rapidly growing risks…and increased and coordinated regulatory attention is necessary.”

Specifically, “Yellen added that ‘it is important, even urgent’ that Congress pass stablecoin legislation by the end of this year,” as Decrypt reports. It’s been a policy goal in Washington, D.C. for a while – now the tone has gotten sharper.

Now, of course, these economists and politicians have their own reasons for opposing stablecoins like UST – which have no interest in the U.S. dollar system they’re tasked to promote… But Yellen might be on to something.

TerraUSD is, after all, only the #3 stablecoin. The top two, Tether (USDT-USD) and USD Coin (USDC-USD), at least have some claims of being backed by U.S. dollars. And they’re both doing just fine: trading within a penny of $1.00 this whole time.

There’s also some reason for optimism in that:

Maybe These Problems Aren’t So Systemic After All

Not only are other stablecoins not experiencing a “bank run” like Terra’s… Bitcoin itself holding $30,000 is good news.

$30,000 was the exact price that Luke Lango of our Crypto Investor Network highlighted in his previous update as a key technical support level.

Bitcoin’s “uptrend that began in January 2022 has been broken. The support level has been violated. What comes next is likely a breakdown to $30,000, at which point we will likely get some big support and a nice bounce,” Luke had predicted on Saturday.

So far, that’s panned out! (Just faster than the “few months” Luke’s chartwork implied it would take.)

So, okay: What does the big picture tell us happens next?

“If/when the financial markets do make a ‘U-turn,’ we believe that a bounce off $30,000 could carry Bitcoin back to a re-test of its $65,000+ highs by year-end,” Luke adds in Saturday’s Crypto Investor Network.

“In other words, we see Bitcoin crashing back towards $30,000 over the next few months, successfully holding those levels, consolidating in the lower $30K range, and then bouncing into a big melt-up towards $60,000.”

Maybe since the crash happened faster…that melt-up can come sooner, too? A girl can hope.

In the meantime, it’s sure to be a wild ride.

The bear market in crypto is no flash-in-the-pan, says Josh Lim of Genesis Global Trading: “We’re seeing a slow-motion meltdown, partially because it’s mostly been long holders selling instead of levered liquidations” from short-term, opportunistic traders.

After all, if you’ve been sitting on BTC (and other cryptos) for a while, you have some long-term profits you can take off the table… Or you can retreat to stablecoins that are actually acting stable, like USDC. (That’s become a popular option, too, whenever crypto runs into trouble over the last couple years.)

Of course, your other option is to wait for your long-term profits to climb back up. This tends to require a single, big narrative that captures widespread attention – like NFTs were last time!

But right now, everyone’s busy with inflation, Russia, China, not to mention all the social issues that have everybody fired up right now. Well, here at The New Digital World, we’ll keep a sharp eye on what could be the Next Big Thing – and keep you informed.

On the date of publication, Ashley Cassell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. To have more news from The New Digital World sent to your inbox, click here to sign up for the newsletter.


Article printed from InvestorPlace Media, https://investorplace.com/2022/05/what-the-bleep-is-happening-with-terra-ust-and-bitcoin/.

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