TerraUSD Triggers Crypto Tantrum
TerraUSD, a “stablecoin” with its value pegged (ha ha) to that of the U.S. dollar, is trading in uncharted territory. Stablecoins are meant to trade relative to the U.S. dollar, remaining ~$1.00 price range. The $1 pegs are ostensibly backed by U.S. treasuries, cash, and other “safe” debt instruments. In late Monday afternoon, TerraUSD began to lose stability, and ultimately sank to as low as $0.690 Monday evening. The break in the peg began over the weekend, and took until today to lose all continuity.
TerraUSD is the 3rd largest stablecoin, but is different than others. Whereas stablecoins are ostensibly backed by safe debt instruments (although the jury is still out on that one), TerraUSD is an algorithmic stablecoin, whose value isn’t really backed by anything at all (the writing was on the wall with this one). TerraUSD balances its $1.00 peg by a supply and demand mechanism between the coin Luna, but we don’t really have to get into that here.
With an early break in the peg over the weekend, the stage was set for a massive crypto dump. Traders sold their respective cryptos heavily over the weekend in anticipation that the platform would need to relinquish Bitcoin holdings in order to support the TerraUSD peg.
A couple of weeks ago, there was a similar plot festering for the likes of Tether. Short sellers were swarming the stablecoin, collectively betting that the peg would be broken and the price would fall. With the entire cryptocurrency market resting upon Do Kwon (the developer behind TerraUSD), we’ll see if the Tether short play actually comes to fruition.
The current state of the crypto market is a whole lotta red (shoutout Carti).
The entire detachment of crypto price action from reality is just a part of the larger “risk-off” trade we’re watching unfold right now. It only makes sense that major indexes today just absolutely bled. Investors are digesting the uncertainty of the U.S. equities, crypto, and probably real estate market in the near future. Some are positing that we are in a much more “interest rate sensitive” environment than we have been in the past. It’s hard to disagree with that statement, just taking into account 2 years of near zero EFFR, coupled with a Fed balance sheet that has swollen to the effect of $9 Trillion.
We are all collectively missing the days of the easy money fed policy + perpetual bull market. We were all making money hand over fist, with not a care in the world. This too, shall pass, I suppose.