Stablecoin Crisis Escalates. Terra Tokens Suffer $30 Billion Wipeout

Stablecoin Crisis Escalates. Terra Tokens Suffer $30 Billion Wipeout

The cryptoverse was front page news again on Wednesday, when algorithmic stablecoin TerraUSD briefly plunged below $0.30. To the uninitiated, that's just indecipherable cryptospeak, but bear with me. This is a big deal. TerraUSD is supposed to trade at $1 all the time. It's a stablecoin. But unlike fully-reserved stablecoins, which are backed by real cash and cash equivalents, TerraUSD depends on automation, arbitrage, active management of treasury assets and incentives to maintain the peg. It
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14 thoughts on “Stablecoin Crisis Escalates. Terra Tokens Suffer $30 Billion Wipeout

    1. In my opinion: Probably. This stuff is more entangled via DeFi protocols than people realize. Just as implosions in traditional finance don’t happen in a vacuum, neither will these kinds of events. Of course, that doesn’t mean Bitcoin is going to go to zero next week. Morgan Stanley didn’t fail when Archegos blew up. The fallout could be so minimal that nobody outside of the cryptosphere even notices, or it could tip dominoes that nobody knew existed. Or, the whole thing could resolve itself over time via the algo/peg mechanism. There’s just no way to know. And that’s really the point.

      1. Apart from the fact that this whole thing is outrageously ironic and downright humorous, why did any of this need to happen? I have several insured checking accounts that I can use for money any time and I don’t have to go through any of the shenanigans you described above. And by the way, why would anyone want anything to do with a “monetary” system so small and fragile that one private individual and a few drinking buddies can claim to “fix it” if it doesn’t work? This is astonishing!

  1. Private money throughout history fails. Crypto is private money- it is built on blockchain protocol but fundamentally it is private money. Since regulation is so lax in this space it should not really surprise anyone that a so called stable coin has imploded. Based on what I can glean in the description, this coin was not truly backed 1:1 by cash/ust bonds or other highly rated sovereigns. So it was bound to implode at some point- and it did. I see that bitcoin is down big this morning- is it squeezing out speculative excess related to higher rates and tightening financial conditions or is it partly related to this problem? Not sure, but I continue to believe that crypto is one sign of speculative excess in financial markets- along with SPACs, NFTs and all kinds of other hair brained schemes. Caveat emptor.

  2. Crypto is like any other asset whose price is hyper sensitive to liquidity. Now that real yields are positive for TIPs maturing past 2027 investors do not need to buy crypto to protect themselves from hyperinflation and negative real rates of return. Things did not go well for crypto in 2018 when we moved from negative to positive real rates of interest.

  3. Anyone have thoughts about the potential for spillover to other asset classes and/or other parts of financial system?

    I’m only a bemused and amused spectator to crypto, so it’s spillover potential is what I really care about.

    1. I was just chatting with another old dinosaur trader. I reminded him that time and time again we’ve seen such seemingly irrelevant difficulties in an obscure & hard to understand asset class suddenly spill-over into a full-fledged financial crises as the lenders who enabled the whole have to start writing down loans or worse. Like Steady Safe Taxi in Jakarta back in the late 1990s!

      One of my fellow old dinosaur partners was prescient when he remarked that Fidelity’s announcement that it will allow plans to put cryto into 401K plans may have signaled a top.

      Yep. It’s no longer a fringe market with limited particiaption. May “mainstream” financial firms felt compelled to dive in. Too bad they went all in at $$50,000 rather than $18,000 ….

      Looking forward to reading how Ric Edelaman is doing with his career pivot.

        1. Well, seems like some prospective down payments probably went up in smoke since that last 4Q2021 survey.

          As if first-time homebuyers didn’t already face an uphill battle nowadays.

  4. So far, commentators are saying that a bad thing about crypto now is that it is correlated to equities. Perhaps the story in a few months is that equities were correlated to crypto.

    TerraUSD is the first domino to tip, next comes Tether: sure Tether “backed”, but the issuer makes redeeming USDT for USD extremely hard.

    Shorting Tesla, Coinbase, and Binance, at this rate, will pay for my children’s college.

  5. COIN just warned that if it goes BK, users’ crypto may become assets in the BK with the users merely unsecured creditors.

    How likely a COIN BK is, I don’t know. CEO says this is just an SEC-required disclosure and users’ crypto is “safe”. But it did just report a large loss with sharply lower trading volumes. I guess crypto traders will need to learn to read financial statements.

    I spent a day reading COIN’s filings some months ago, then deleted the contents from my brain as I decided I wasn’t interested in buying the stock. I do (vaguely) recall that COIN’s revenue/trade from institutional crypto trading was much lower than from individual traders, yet the bulk of its expected growth was on the institutional side.

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