Issue of the week: luna’s death spiral
A vicious crash has shaken confidence in the entire crypto ecosystem
In January, Mike Novogratz – a former “hedge fund rockstar turned crypto heavy-hitter” – tweeted a picture of a sizeable new tattoo on his left shoulder, said the FT. In homage to his favourite cryptocurrency, luna, it featured an image of a wolf howling at the Moon. “I’m officially a Lunatic!!!” he added. Back then, luna was trading at around $78; by the start of April, it had hit $116. But last week its value slid to “zero” after terraUSD – a sister “stablecoin” that was supposedly pegged to the US dollar – collapsed in value. In all, some $41bn was wiped out, said The Guardian, marking “the largest destruction of wealth” in crypto’s history, according to the analytics firm CryptoCompare.
The shock had a seismic effect across the sector, knocking 15-25% off the value of rival currencies and whacking the already fragile share price of the market’s main exchange, Coinbase. Stablecoins were hit particularly hard, causing the largest, tether, to break its one-to-one link with the dollar on consecutive days. That caused near “panic”, said Simon Freeman in The Times. Unlike more speculative crypto tokens, stablecoins – as the name suggests – are supposed “to bring a measure of stability” to volatile crypto markets, because they’re underpinned by realworld assets. TerraUSD was designed by the Korean entrepreneur Do Kwon, using a complex “algorithmic” arrangement in which its dollar peg would be maintained via the fluctuations of its sister coin, luna, said James Titcomb in The Sunday Telegraph. Many were not surprised when it collapsed, but were shocked when “supposedly more secure coins” backed by cash reserves also wavered.
“Crashes are always painful in the short run,” said Jonathan Levin on Bloomberg, but they have a function. A dot-com-like shakeout for digital currencies might “root out the wannabes and set the stage for true innovation”. Yet with the viability of stablecoins now in question, “the entire crypto market is uneasy”, said the FT. It doesn’t help that tether, which supposedly has $80bn of dollar assets backing its 80 billion coins in circulation, won’t reveal details of them – claiming that would give away its “secret sauce”. “If armchair investors lose their shirts and a few crypto bros see their egos deflated, the reaction may be a shrug of the shoulders.” But if tether faces a wave of redemptions, and is forced to sell assets, “the sheer size of such moves could make already jittery financial markets even more volatile”. Politicians must stop dithering and heed the warnings. “Stablecoins can prompt bank-like runs”, yet they “enjoy the scant regulation of the cryptosphere. Real-world rules are needed.”