This week saw a slow-motion disaster play out in crypto. The stablecoin TerraUSD (UST) crashed down to earth -- hard.
As of press time, it's worth less than a nickel. Its sister coin Luna, meant to help keep the price of UST pegged to $1, has nearly died -- while last month it hit an all-time high of $116, it's now worth 6/100ths of a penny.
On this Friday's Unchained, Jonathan Wu, head of growth at Aztec Network, breaks down what happened to turn the once high-flying stablecoin ecosystem into the biggest recent tragedy in crypto.
He explains how the system worked, what could have sparked the de-pegging and why he believes Terra or another algorithmic stablecoin will rise again. It's a not-to-be-missed episode.
Also, due to this week's fast-moving events, we will be livestreaming our recording of next Tuesday's Unchained -- an interview on UST with Nic Carter, Eric Wall, and Erik Voorhees. The show will livestream Friday, May 13, at 11:30am ET on the Unchained Podcast YouTube channel at https://www.youtube.com/c/UnchainedPodcast.
In addition to the LUNA chaos, crypto was also hit by an unexpectedly high inflation number, causing prices to stumble.
On Wednesday, the Bureau of Labor Statistics reported that the Consumer Price Index was up 8.3% in the 12 months ending in April. In the days after the CPI numbers came out, BTC and ETH hit a low of $25,200 and $1,748 respectively – though it is not certain that the inflation report caused the dip. In addition to BTC and ETH struggling in the wake of high inflation and the Terra bank run, Tether or USDT, the $150 billion stablecoin, was briefly knocked off its peg on Thursday and fell to $.98.
BTC, ETH, and USDT were certainly not the only crypto assets to be affected by the Terra and CPI numbers. In total, over $440 billion in value was wiped out in terms of market capitalization from the crypto industry, data from CoinMarketCap shows. Furthermore, nearly $4 billion in short and long positions were liquidated this week, reports CoinGlass. NFT prices went down heavily as well.
The floor price of Bored Ape Yacht Club (BAYC) has gone down 25% over this week. And CryptoPunks’ floor price suffered a drawdown of 15%. Considering that these NFTs are priced in ETH and the ETH price plummeted in relation to USD, the loss is much higher than 25% and 15%.
Raoul Pal, CEO of Global Macro Investor, says a recession is coming and that “crypto is in full panic mode.” However, he compared the fear people are feeling now with the sentiment of March 2020 – which led to a major bull run. He pointed out that “tough times like these are the times to buy.” On the other hand, Peter Schiff, the famously anti-crypto economist, (unsurprisingly) recommends that people sell their BTC. “Selling now is not panicking. It's smart to cut and run,” he said on Twitter.
This week, Instagram launched its NFT pilot, in which select US creators and collectors will be able to share NFTs that they have created or bought. (Disclosure: I write a Bulletin newsletter for its parent company, Meta.) According to Instagram head Adam Mosseri, enabling NFTs offers new ways for creators to earn money from their content. Through NFTs, artists, musicians, and creators will be able to tokenize their work and verify ownership of it.
“I want to acknowledge upfront that NFTs and blockchain technologies are all about distributing trust and distributing power,” Mosseri said in his announcement. “But Instagram is fundamentally a centralized platform, so there’s a tension there.”
Instagram NFTs will first support Ethereum and Polygon. Executives hinted that Flow and Solana will be coming soon. Ryan Wyatt, CEO of Polygon Studios, said on Twitter that “Facebook chose Polygon due to Polygon’s carbon-neutral footprint, its scalability, and the developer ecosystem.”
Meta CEO Mark Zuckerberg commented, “Meta plans to bring NFTs to apps in our family. Similar functionality is coming to Facebook soon, along with augmented reality NFTs on Instagram Stories via Spark AR so you can place digital art into physical spaces.”
Michael Saylor, founder and CEO of MicroStrategy, the publicly traded software firm known for its large amount of Bitcoin holdings, shed light on the company’s obligations concerning its bitcoin-backed loans.
He tweeted, "MicroStrategy has a $205 million term loan and needs to maintain $410 million as collateral” – meaning that the liquidation price of the company’s BTC loans is $3,562. However, even if BTC reaches that price, Saylor assured the space that he is ready to put up other collateral, like company stock or assets, so that he doesn’t have to sell BTC.
MicroStrategy holds 129,128 bitcoin, which at current prices is valued at more than $3 billion. The firm’s average buy price for its bitcoin holdings is $30,700. Even though it is clear that it doesn’t plan to sell, considering bitcoin’s current price, the firm has an unrealized loss of roughly $330 million on its investment.
Treasury Secretary Janet Yellen asked for new stablecoin legislation by the end of this year on the same day TerraUsd (UST) started de-pegging. She even referred to the UST stumble in her speech.
“I think that [UST] simply illustrates that this is a rapidly growing product and that there are risks to financial stability,” Ms. Yellen said at a hearing on Tuesday before the Senate Banking Committee. She also added, “We need a consistent federal framework.”
When asked by Pennsylvania Senator Pat Toomey if the goal was to get the legislation done during 2022, Ms. Yellen responded that she thinks “it would be highly appropriate.”
In addition, in her written testimony, Yellen said she has been working on identifying the risks that digital assets impose on financial stability.
However, after being questioned by Representative Jim Himes in a hearing before the House Financial Services Committee, Yellen recognized that the stablecoin market has not yet reached a size big enough to impose a major risk on the financial system.
On Monday, El Salvador’s President Nayib Bukele tweeted that his country “just bought the dip.” According to Bukele, the country purchased 500 coins at an average USD price of ~$30,744.
Bloomberg reports the government has purchased 2,301 bitcoins since September, with Monday’s acquisition being the largest since it started buying. The cost of all these purchases combined is approximately $103 million. At the current price, the bitcoin held by El Salvador is now worth ~$70 million, which translates to a 32% unrealized loss so far.
Bukele has earned himself a lot of attention since he decided to adopt bitcoin as legal tender in his country last September. Plenty of skeptics think his decision was not wise. For example, the International Monetary Fund has been at Bukele’s back to reverse his decision. In January, an IMF report urged authorities to remove bitcoin’s status as legal money. IMF directors “stressed that there are large risks associated with the use of bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.”
Coinbase, the largest cryptocurrency exchange in the United States by trading volume, revealed that user crypto assets might remain as the company’s property in the event the exchange files for bankruptcy. This disclosure was included in its first-quarter earnings report as one of the risk factors of using the platform.
“Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors,” the exchange wrote.
However, according to CEO Brian Armstrong, user funds are not at risk at this very moment. “The funds are safe at Coinbase, just as they’ve always been,” he tweeted.
And, he added, “we believe our Prime and Custody customers have strong legal protections in their terms of service that protects their assets, even in a black swan event like this.”
At the end of his statement, he reminded people about Coinbase Wallet, the usage of which would not run that risk: “We offer a self-custodial wallet solution for those who prefer to store their own crypto.”
As for the rest of Coinbase’s earnings report, it appeared to be a tough Q1. Coinbase reported a loss of $430 million and a 19% drop in monthly users. This had very negative effects on the company stock, COIN. By Thursday, it was trading around $56 – a 50% drawdown in less than a week.
According to CNBC, Google is putting together a Web3 team to build services for developers running blockchain applications. It appears that Google intends to not fall behind on the Web3 curve and will try to capitalize on the surging popularity of cryptocurrencies and blockchain projects.
Last Friday, Google Cloud Vice President Amit Zavery told employees in an email, “while the world is still early in its embrace of Web3, it is a market that is already demonstrating tremendous potential with many customers asking us to increase our support for Web3 and Crypto related technologies.”
Instead of building projects of their own, it seems that Google’s strategy to enter the crypto space is to support developers by offering them tools to build their own applications and projects. James Tromans, a former Citigroup executive who arrived at Google in 2019, will lead the product and engineering group and report to Zavery.
Google joins Meta, Twitter, Nike, and other corporations in an attempt to capitalize on the Web3 opportunity.
Madonna, in collaboration with digital artist Beeple, announced the release of her first NFT collection.
The three-video NFT features a CGI Madonna giving birth, which is the reason they called it “Mother of Creation”. She is GIVING BIRTH to NFTs.
“We set out to create something that is absolutely and utterly connected to the idea of creation,” said Madonna in a video uploaded on Twitter. “I am doing what women have been doing since the beginning of time”, she added.
The auction for the “Mother of Creation” triptych went live on Wednesday and will end on Friday. The proceeds will go to three organizations: National Bail Out, V-Day and Voices Of Children.
The collection has three videos, which are called “Mother of Technology”, “Mother of Evolution” and “Mother of Nature”. As of Thursday, they are priced at 14ETH (~$26,000), 10ETH (~$19,000), and 15ETH (~$29,000), respectively.
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