Well, this weekend was, at least, less chaotic than the previous one. But there’s still a lot going on that investors in the New Digital World need to be aware of… And the Bitcoin (BTC-USD) chart indicates we might not be out of the woods yet. Let’s dive into the details.
Controversy Over Staked Ethereum
“Pegs” are a sore subject in crypto these days. After all, most coins took a nosedive after TerraUSD (UST-USD) started losing its peg to the U.S. dollar last week. And UST isn’t alone. A smaller algorithmic stablecoin called DEI (DEI-USD) is now also trading far below $1.00.
While “long-term stETH holders are perfectly fine” and “liquidity providers are not at risk,” says Lido, “leveraged positions on stETH are at risk” after this happened on Friday:
Against a backdrop of wider market turbulence, the stETH:ETH swap rate has deviated from its 1:1 peg.
At the time of writing stETH is trading at a discount of 4.2% to ETH on the main Curve pool.
— Lido (@LidoFinance) May 13, 2022
Decrypt is reporting that this is still more fallout from the collapse of Terra (LUNA-USD) – as “people who had [stETH] in the Anchor lending protocol, which runs on the all-but-defunct Terra blockchain, rushed to retrieve it on Friday.”
“As long as stETH is trading at a discount…there won’t be enough ETH in the pool to back everyone’s stETH,” as Decrypt further explains. That’s dangerous for those who’ve leveraged their stETH for a loan or something.
But – as Lido co-founder Jordan Fish also highlighted on his popular “Cobie” Twitter account… It’s not necessarily a big deal for ordinary positions that are just waiting for the “Merge” to proof-of-stake. “When redemptions are possible on ETH2, 1 stETH can be redeemed for 1 ETH,” he noted in the tweet thread. “UST cannot be redeemed for USD ever. So they’re not really similar at all.”
stETH and ETH are not “pegged” – stETH is not a stablecoin. It’s a wrapped staked eth on beacon chain. Staking derivatives don’t always trade 1:1 because there is often selling pressure when people prefer liquidity. stETH still works fine regardless of it’s price against eth.
— Cobie (@cobie) May 16, 2022
Happily, the Merge is moving along through various “testnets,” according to Ethereum developers, and we can most likely put this all behind us when the Merge completes. It should be a major turning point for crypto – so stay tuned.
Speaking of stablecoins, though…
Investors Flock to Tether… Then USD Coin
TerraUSD wasn’t the biggest stablecoin, but it was #3 in the rankings and reached nearly $19 billion in market cap before its swift downfall.
So, in its wake, capital had to go somewhere. Initially, the #1 stablecoin, Tether (USDT-USD) seemed to catch most of this rotation. Last Wednesday, as TerraUSD plunged to roughly $0.60, Tether saw $140 billion in trading volume – more than BTC and ETH combined – reported Blockworks.
That ratio is still in effect today. But the market cap tells another story. Tether is down sharply in that regard, from about $83 billion before Terra’s collapse…to more like $75 billion today.
USD Coin (USDC-USD), on the other hand, is experiencing the exact opposite. The #2 stablecoin has gone from $48.5 billion to above $50 billion market cap in the same timespan.
While both Tether and USD Coin have maintained their dollar pegs admirably… It’s worth noting that USD Coin might be the safer choice. Tether is much more reliant on short-term corporate debt, bank CDs, Treasuries, and even other cryptos for its stablecoin reserves, while USD Coin has a much larger backing in actual U.S. dollars.
It’ll be interesting to see if Tether’s reserve mix puts it under fire from the SEC or the U.S. Treasury Department. “As the Terra blowup prompts more stringent regulation of crypto in general and stablecoins in particular, we believe that more secure and conservative blockchains like Bitcoin and Ethereum will continue to gain market share in the crypto market ecosystem,” conclude analysts from Cathie Wood’s ARK Invest in this morning’s weekly newsletter.
Trouble on Bitcoin’s Chart
Another reason for rotation into stablecoins is, of course, a general sense of panic for traditional cryptos. Bitcoin got nearly to $26,000 mid-last week, a price not seen since December 2020.
Since then, “bitcoin does appear to be showing some support at $30,000, but not much. It is certainly acting like it wants to sustainably break below $30K. That’s worrisome, because below $30K, we have some huge air pockets,” writes Luke Lango for our Crypto Investor Network, where he had flagged $30,000 before as the line in the sand.
“If we don’t [hold $30K], we likely push towards $20K, and then there exists a viable pathway towards $10K,” Luke continues.
That being said: “To us, it feels like the Terra collapse was the ‘final flush’ of this crypto sell-off,” Luke writes, comparing it to the collapse of Enron that “mark[ed] the beginning of a bottoming process for the dot-com crash.”
What Should Crypto Investors Do Next?
“Our strategy is pretty simple here,” Luke declares in Crypto Investor Network. “We’re waiting [and] heavily emphasizing portfolio consolidation.
“This is a crypto bear market. Strong cryptos will survive bear markets. Weak cryptos will get flushed. We believe all of the cryptos in our portfolio are strong cryptos. However, we still believe the best move is to consolidate our portfolio around only the strongest cryptos in our portfolio right now.”
Thanks to Luke and his team, I’ve highlighted some of the characteristics of the strongest cryptos previously in The New Digital World. But our team is working on specific recommendations now, so sign up here to receive their list of the “best of the best” – as the model portfolios are for members only. Go here to learn more and navigate this wild market as part of our Crypto Investor Network.
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.