Weekly Market Overview
Welcome to this week's episode of the Crypto Wealth Cafe, and what a week it’s been!
At the time of writing Bitcoin is $30,367 and Ethereum is $2080, so both are still down from where they were a week ago. The Crypto Fear and Greed Index is at the lowest level it has been since early 2020, so the sentiment in the markets remains dire.
Before the crash Bitcoin started at around $40k and plummeted to as low as $26K. And now it is kind of stabilising around $30. Now, of course, it is not just crypto, all financial markets around the globe are suffering at the moment. And this is the same old story. I feel like I say this every week, but it's just a combination of a multitude of factors creating a perfect storm.
All that easy liquidity, the money printing that happened in the first two years of the pandemic has caused inflation to ramp up all around the world, which is putting additional pressure on all global economies. So if we look to the USA, the Fed is now stuck between a rock and a hard place. Do they fight inflation? How do they do it? What do they do with interest rates? It's all a bit of a balancing act. And the result is what you see here. Extreme pain is concentrated in tech stocks and crypto. But there is damage all over the place. Google is 23% down from its all time high, Nike is 36% down, Tesla 37%, Amazon 40% down, Virgin Galactic 89% down, and Zoom 84% down. Then you have PayPal, Netflix Lyft, DoorDash, Uber, Facebook, Disney, eBay, Starbucks, etc etc. All the world’s biggest brands are suffering, just like crypto investors.
And in crypto the big story of the crash was the implosion of Luna and its USD stable coin.
I thought it'd be worthwhile just recapping it as briefly as I can.
A stable coin should equal $1. That's the whole idea. The original purpose of stable coins is to help people get in and out of the dollar easily when they're making trades without having to go back to a legacy financial bank account, which would take too long. So now because of that they facilitate most crypto trading volume and the various DeFi ecosystems.
Now there's a few different flavours of stable coins out there, and together they represent around $160 billion of value. Now the three big ones, USDT, USDC and Binance USD, are collateralized stable coins issued by a centralised identity so that each coin can be redeemed for $1 by the holder from the issuer. And that's what gives those stable coins their value. Traders know that they can always redeem those stable coins for real fiat dollars.
Luna crashes back to earth.
Now we get to the LUNA stable coin, which is not collateralized. Instead it is what is called an algorithmic stable coin. It was powered by the Terra protocol and backed by a crypto token called Luna. The idea is when the USD price is more than $1 the protocol incentivises users to burn Luna and mint UST. And when USDS price is too low or less than $1 the protocol incentivizes users to burn UST and mint Luna. That is all supposed to balance out and keep the peg stable. It's a brilliant idea. And for a while it worked - until it didn't.
Algorithmic stable coins are a really fascinating idea, and a lot of people are excited by them. But they're also viewed as very risky, very experimental. And it's a little bit too soon to see how we can get an algorithmic stable coin to work at scale. Luna was by far the largest one. And well we saw what happened at scale, it got too big. It got attacked and lost its peg.
So this is what happened last Monday Luna which was worth 18 billion edit speak, was attacked. That's how markets work. It's a little bit similar to when George Soros made a lot of money shorting the British pound. It's a speculative attack on another currency.
But then last Monday, bam, effectively back to zero. This is kind of the single biggest wealth destruction event that crypto has ever seen. And so all those Luna holders didn't really even have time to sell a lot of them. They just saw their investment go from hero to zero within the space of a 24 hour period. It wiped out a lot of holders who were small retail investors. Very, very sad to see. And of course, you know, what's interesting about Luna is that it was led by a brash, charismatic, so would say arrogant leader. In response to people saying that Luna was on borrowed time he tweeted on May 8 ‘no, it's not going to happen.’ Well it did and now Luna’s collapse affects everybody, including millions of retail investors who bought into the Luna story. They put their savings into the Anchor protocol to get the 20% pa that Luna was offering. There were billions and collateral that Luna was holding in Bitcoin, which they had to sell to try and defend the peg and it didn't work. So somewhere on the order of 80,000 Bitcoin came back on the market last week. And that is why the crypto market crashed, and crypto’s credibility unfortunately took a big hit. This, of course, gives regulators the motive and rationale to aggressively regulate stable coins, because they view them as a threat to the US dollar.
Don't get me wrong, I'm not against regulation. We do need regulation. But you still need a balance between regulations that protect investors, but still encourage innovation. You know, you can't throw the baby out with the bathwater. But there's going to be a lot of pressure in the US especially to regulate stable coins and regulate crypto Bitcoin. Again, the key point is, yes, regulations are good, they're positive for the industry.
So back to Luna. A lot of Bitcoiners were happy that Luna were buying 80,000 Bitcoin. But others pointed out that it presents a future risk for the Bitcoin price if Luna encounters a problem and is forced to sell a lot of Bitcoin to defend its USD peg. Also there was the unsustainable Anchor protocol with its 20% yield, so Luna was an explosion waiting to happen. Of course we also had equally respected crypto figureheads who were very bullish on Luna, including Mike Novogratz, who is the CEO of Galaxy Digital, one of the big crypto funds. He was such a massive fan he got a LUNA tattoo.
What’s next for the market?
This is still coming out on the wash as to exactly where all this has gone on there, documenting it, but it's still a little bit early to have a kind of a final wrap up on all of this. But now we see who the blue chips are, who the builders are, who the credible assets are. Bitcoin is battle tested, Ethereum is battle tested. Luna got battle tested last week, and it could not stand up to the fight. So that's why you gotta be careful with what you invest in, and crypto don't invest in too much stuff you don't understand? Or if you do, it's fine to have lots of speculative investments, throw some money at some small coins, but not your life savings, not huge amounts. And in my view, I mean, my portfolio is always very heavy Bitcoin and Etherium. And anything else is just small, small amounts. Just for fun.
All right, so was this your first significant market crash? Is this your first bear market? You know, you got to understand from some people's perspective, this is how you earn crazy returns over the years by tolerating volatility that no normal person can or would tolerate.
You know, there's no use buying a bunch of crypto at the top, and then waiting for it to crash and selling it when it crashes. Because then you just lost all your money, lost all your assets. So the question is, can you tolerate volatility over a year, two years, five years, 10 years, you know, after three or four years or market cycle, you will probably be in the green, you will have learned some lessons, but it's just not easy tolerating volatility. It's intense.
All right. Do we have any good news? Well I just thought it was interesting as we finish off, there are 44 nations learning about Bitcoin in El Salvador at the moment. Their head bankers have gone over to El Salvador for a kind of a big Bitcoin pow wow. There’s Paraguay, Ghana, Namibia, Namibia, Uganda, Haiti, Jordan, Gambia, Madagascar, Rwanda, Pakistan, Egypt, Jordan, Nigeria, Amenia, Bangladesh, Zambia, Liberia, Sudan and others. So you know, a lot of the smaller countries, but imagine if just two or three of these countries adopted the Bitcoin standard. That’s how mass adoption starts.
So we've reached the end of the show. I hope you learned something about Luna and why algorithmic stable coins are a fascinating, exotic experiment. And crypto is full of fascinating exotic experiments. But the more exhausting, exotic and exciting and volatile the experiment is, you know, the less of your capital you want to risk. And if you take one thing away from today's show, take that away. And look, hey, I'm excited. It's an interesting time in the world. It's always an interesting time in crypto. Are we in a bear market? I mean, yeah, I guess we are for now. We have been for quite some time. That is the time to build. That is the time to build your conviction. That is the time for the weaker projects to be flushed out. We'll here every week on the Dacxi YouTube channel and here at the Dacxi blog to keep you informed and track the market’s progress. We'll be the first to tell you when the bull market or resumes.
Thanks for watching the Dacxi Crypto Wealth Cafe.