Cryptocurrencies are dead. Long live cryptocurrencies

There is an air of change in the crypto world. The Terra affair has called into question the entire sector, and to understand where to start again we need to take a look at the path taken so far

The end of an era?

The crypto market has seen a succession of negative days in recent times. Not only with regards to the mass sell-off , but also due to a series of circumstances that risk compromising what has been built well. 

We mean a period that has lasted for a couple of years now , with a “bull run” that not only brought Bitcoin to the fore all over the world due to the large number of investors, but also a myriad of projects and application cases that they involved a number of people never seen before. One could think of NFTs and the world of gaming , passing through the metaverse , up to the most innovative development of DeFi . And that’s just the surface. 

Talking about it in these terms today almost seems to describe a distant past, but it is perhaps precisely this element that is decisive for understanding how the entire sector can change from one moment to the next , strong in an innovative drive that can rarely be found in other areas. Negatively, as happened recently, but also positively, as he has always been able to demonstrate. 

Because this is precisely the point to focus on, and not to forget or pretend to ignore when things seem to be going south. A continuous metamorphosis leads to the creation of a carousel of emotions, which often throws smoke on the intrinsic value of what has been achieved. But as an old writer said, “facts die hard”, and if we recognize what the sector has been able to show in concrete terms in recent years, then we can bet that the future still has a lot of innovations in store .

But to do this you need to think for a moment . What happened these days? And how has it influenced the development path of the crypto industry? We will try to focus on the entire context, specific and collateral, to take stock and look to the future with new perspectives. 

I: The end of TerraUSD

Let’s start from the end. The implosion of TerraUSD (UST) was an atomic bomb. In its own small way, like the fall of the Western Roman Empire, the French Revolution or the crisis of ’29: nothing will ever be the same again. 

We have already talked about the matter in depth , but in order not to lose the thread of the discussion, a brief summary will suffice. The UST stablecoin lost its peg , or its peg to the dollar, at the beginning of last week. LUNA , the cryptocurrency of the Terra ecosystem closely linked to UST, has gone from a value of 119 dollars last April to one that borders on zero these days. 

The losses, obviously, were not detailed, but involved the entire sector . Bitcoin reached a minimum of 25 thousand dollars, equaling the levels of December 2020, and compared to the historical ATH of 69 thousand dollars the distance is sidereal. Ethereum, for its part, fell below 2 thousand dollars. 

Furthermore, “ Terragate ” has reopened the debate around the very concept of stablecoins , even in its more traditional versions. The critics of the Earth ecosystem, who all emerged together after the incident shouting “I told you so”, noted the imperfection of the mechanism underlying UST, and the attempts of the Luna Foundation Guard (LFG) to save the stablecoin, moving its Bitcoin reserves to save the peg to the dollar. But concerns also affected Tether (USDT), which also lost its peg for a short period of time, reaching $0.97. 

II: The stablecoin problem

Stablecoins are the big elephant in the room . At least for a large part of investors. It might seem like spitting on the plate you’ve always eaten from, but the collapse of UST has opened a gap in the debate, and it may be useful to look at the topic from a more skeptical side for once. 

This technology was created mainly to meet the natural need of investors to find a means to protect their crypto assets from the problem represented by their volatility . Certainly, a faster method (and much more convenient for a thousand reasons) than exchanging with a traditional fiat currency. 

A cryptocurrency pegged to the dollar implies that it is fully backed by a corresponding asset , such as cash and bonds (this is the case with USDC). But the open secret is that this is generally not the case at all. This was discovered first hand with UST, which is different in its design and way of functioning as an algorithmic stablecoin, but also with Tether, which remains the most important given its 80 billion dollar capitalisation. 

The point is that if there are 80 billion USDT in circulation, supporting the asset with one of the same value but non-crypto is particularly expensive. And in fact this is not the case , given that Tether itself claims that its collateral consists mainly of short-term commercial loans , without (among other things) having ever revealed to whom they were actually granted. 

The issue is not insignificant, and those who know it well are the regulatory bodies around the world. Tether, or at least what lies beneath it, is now such a huge reality that it could be not only a threat to the crypto sector, but to the real economy itself. This was said by Janet Yellen , US Treasury Secretary , but also by the European Union and China , against the backdrop of discussions that see the emergence of the Central Bank Digital Currency (CBDC) project. 

Creating a further problem for the crypto sector, namely the threat that the sector will one day be deprived of its main quality, namely decentralization . Combining these needs was the aim of TerraUSD, which however failed miserably in the face of market conditions that caused it to lose confidence in it, triggering a “bank run” that caused its collapse. 

III: Inflation

If that were not enough, even by broadening the horizon of the analysis it is difficult to find the points of reference that until now had given us the opportunity to approach the sector with criteria. One above all, the correlation between the performance of the crypto market and that of the stock market . Bitcoin, considered by many as the new digital version of gold , seemed to give the impression of being a potential inflation hedge investment, but the performance of the crypto markets does not seem to confirm these assets as possible reliable stores of value. Especially in times of uncertainty. 

Gold, on the other hand, has always had an inverse correlation to stock market price movements, and continues to this day. If the S&P 500 has fallen by around 16% since the beginning of 2022, the price of gold has increased by 3% (even if it has also been on a downward trend lately). 

All this certainly cannot be taken for granted, given that a fundamental game for the future of Western economies is being played precisely on the issue of inflation . It is precisely inflation and its fear, in this sense, that has driven the selling pressure on the stock market in recent months, which in turn has certainly not been helped by the aggressive policies of the Federal Reserve System (FED), which intervened to limit the high persistence of asset depreciation. In the United States, the consumer price index (CPI) increased by 8.3% in April compared to a year ago, and is the highest reading of the inflationary phenomenon since 1981. In Italy the figure is 6.4% (Istat data). 

Just at the beginning of May, however, the FED raised interest rates by 50 basis points , bringing the cost of money to a range between 0.75% and 1% from the previous 0.25-0.50%. . And Jerome Powell , chairman of the Federal Reserve, said that further increases will be discussed at future meetings of the Federal Open Market Committee (FOMC). This will also entail, in parallel, the reduction of the FED’s own balance sheet, i.e. the Treasury securities, which consist of agency and mortgage-backed debt securities, starting from June 1st, for an initial total of 47.5 billion dollars, destined to grow to 95 billion in the following months. 

Inflation, increase in interest rates and war in Ukraine (as if that were not enough) are therefore the main cause of a market now devoid (at this historical moment) of points of reference. And investors, as a result, do not seem to find significant shelter. They certainly didn’t find it in the crypto market . 

IV: The role of Bitcoin today

Regardless of their intrinsic value, their history of extreme volatility weighs heavily on cryptocurrencies , and although early investors have made fortunes by betting on assets such as Bitcoin or Ethereum , these do not seem to retain the same attractiveness in times of great uncertainty. 

After all, Bitcoin has always seen moments of deep darkness (in 2018 it fell by 80%), and this remains a non-negligible element. Whatever anyone says, the fact that Bitcoin is not tied to physical assets , is not related to intellectual property and does not generate cash flows or pay dividends makes it difficult, again from the point of view of the old school of investors, to evaluate its value fundamental. And being exclusively linked to supply and demand shows all its weaknesses. 

The recent statements by Warren Buffett , CEO of Berkshire Hathaway, are symptomatic, and certainly do not help. “Whether it will rise or fall (Bitcoin cf.) next year or five years or even ten, I don’t know,” Buffett said, during Berkshire’s annual investor meeting. “But one thing I’m sure of is that it doesn’t multiply, it doesn’t produce anything.”

In short, certainly not an endorsement, but in any case, regardless of opinions, the fact is that even if the entire market sees a radical decrease in volatility, the recent price action heralds a bumpy ride for short-term investors to say the least. 

The watchword, in these cases, remains ” caution “, especially for those tempted by the classic ” buy the dip “. When asset prices decline rapidly (and this is the case), cryptocurrencies can cause certain trades to be considered the deal of the century. In many cases it works, but there is also an old finance rule that invites you to be wary of certain scenarios: “ Never catch a falling knife ”. Because we usually get hurt.

For example, Nayib Bukele , president of El Salvador , knows this well . And it is the perfect image that describes the status of Bitcoin and cryptocurrencies nowadays. On the one hand, the first state to have dared to experiment with BTC as a national currency , creating a fundamental precedent among the cases of application of the cryptocurrency, on the other, a country that finds itself one step away from default , with an 800 million bond dollars expiring in January and a ” Bitcoin Bond ” which is slow to arrive on the market due to the unsuitable moment.

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