Good morning. Here's what happened:
Prices: Bitcoin hits lowest level since December 2020 amid UST implosion.
Insights: algo stablecoins may not be such a good idea.
Technician's take: BTC is heavily oversold, but uptrend seems limited.
PricesBitcoin
(BTC): $28,550 -8.1%
.Ether (ETH): $2,050 -12.8%
Biggest winners
There are no winners in CoinDesk 20 today.Biggest losers
| Asset | Ticker | Income | DACS Sector |
|---|---|---|---|
| Internet Computer | ICP | -30.9% | Data Processing |
| Polygon | MATIC | -28.0% | Platform for smart contracts |
| Solana | SOL | -27.5% | Smart contracts platform |
Cryptocurrencies plummet amid LUNA implosion
Ouch.
What else was there to say about Wednesday's trading in the crypto markets?
Bitcoin temporarily fell to $27,700, a new 16-month low, before recovering, but that was still part of a mass selloff in digital assets triggered by the implosion of stablecoin TerraUSD (UST) against its $1-to-1 dollar peg.
"It's a very nervous time in the crypto markets following the collapse of the controversial stablecoin UST and with the majority of institutional crypto investors who invested last year now losing money," wrote Oanda Americas Senior Market Analyst Edward Moya.
The Terra blockchain's LUNA token, created as a buffer against the volatility of the UST stablecoin, plunged 96% at one point after the Luna Foundation Guard, the nonprofit created to support the Terra network, shifted its reserves to bitcoin exchanges to defend the dollar peg. UST fell as low as 23 cents before recovering to 77 cents during the day. Stable it was not.
Bitcoin, the largest cryptocurrency by market cap, recently traded at $28,500, down about 7%, though it outperformed most other major cryptocurrencies, underscoring its status as a less risky option in turbulent times for the broader digital asset market. Ether, the second-largest cryptocurrency by market cap, was also down, falling about 11% over the same period to around $2,050.
The charts were even darker red and included AVAX, SOL, and SAND, which recently fell 36%, 33%, and 31%, respectively. Popular meme coins SHIB and DOGE plunged 29% and 26%, respectively.
Stock markets joined in the misery as investors digested the latest U.S. inflation data, which fell slightly in April but was still at its highest level in four decades. Prices for food and other consumer goods, air travel and services rose amid rising energy costs and a slowdown in supply chains exacerbated by Russia's unprovoked attack on Ukraine.
The tech-heavy Nasdaq fell more than 3%, and the S&P 500 and Dow Jones Industrial Average each fell more than 1%. In contrast, gold, the traditional safe haven against risk, rose about 1%.
"Today's market reaction to the inflation report will make it difficult to attract investors who are still on the sidelines," Moya wrote. "Risks on Wall Street are increasing and now include a Fed policy mistake, liquidity and credit risks, and growth concerns."
He added that bitcoin "remains very vulnerable to further selling pressure and could see further technical selling if the $28,500 level is breached."
MarketsS&P500
: 3,935 -1.6%
DJIA: 31.834 -1%
Nasdaq: 11,364 -3.1%
Gold: $1,852 +1%InsightsAlgorithmicStablecoins
may not be such a good idea
.LUNA and UST, the token and stablecoin from Singapore-based Terraform Labs, continued their slide as the UST key design imploded and trader sentiment towards LUNA plummeted.
The impact wasn't limited to niche regions of the Internet, either, as suicide helplines popped up on community forums dedicated to Terra.
UST, a stablecoin pegged to the U.S. dollar, fell as low as 28 cents on Wednesday despite being backed by notable crypto venture funds such as Three Arrows Capital and Luna Foundation Guard (LFG).
The price drop was not surprising, however. Several algorithmic stablecoins have largely failed over the past two years and none have caught on. have been issued over the past two years. Most have failed, some have survived, and none have caught on.
Examples include Iron Finance and its TITAN tokens, Basis Cash, Empty Set Dollar, Dynamic Set Dollar, and many more. These meant millions of dollars in losses for investors.
Algorithmic stablecoins such as UST are backed by a basket of assets such as LUNA and Bitcoin (BTC) without the need for these assets to be held by a centralized third party. This is in contrast to Tether and USD Coin, whose parent companies claim to hold actual dollars in accounts to sufficiently back the value of USDT and USDC, respectively.
Tokens such as UST depend on LUNA to maintain a $1 price using a series of on-chain mint and burn mechanisms. Traders can exchange $1 worth of UST for $1 worth of LUNA at any time, and vice versa - with the growing value of LUNA serving as a shock absorber for the UST price.
However, the mechanism of algorithm-driven stablecoins like UST makes them vulnerable to the colloquial bank run.
As an example, consider Terra's LUNA and UST tokens. A sudden drop in the price of LUNA affects UST's entire stabilization mechanism, as users can no longer exchange their $1 UST for $1 LUNA. This leads to a downward spiral as falling UST prices affect sentiment around LUNA and a LUNA sell-off leads to lower UST prices.
An example of this is Wednesday's price action. LUNA fell below $6 - a 96% drop since Tuesday - while UST slumped to 28 cents.
Analysts and market watchers say algorithmic stablecoins remain a concern.
"Algorithmic stablecoins that we see in the market today are inherently fragile because of their design," Kate Kurbanova, co-founder of risk management platform Apostro, said in a Telegram chat. "They try to keep the bond by using different algorithms, market incentives and so on - but still they are very fragile and rely on the market and the price of the reference asset."
"However, such experiments work because there is a demand for stablecoins - especially when it comes to juicy APY," Kurbanova added, justifying their popularity.
The conclusion? Retail investors may want to steer clear of algorithmic stablecoins that aren't ready for prime time, as evidenced by the many failed experiments (and dollar losses). It's not as if the crypto market isn't a risky enough asset class.
Technician
'sopinionBitcoin struggles
near $27K-$30K support zone
.Bitcoin (BTC) is down 6% in the last 24 hours and is trading at the bottom of a one-year price range. The cryptocurrency could find support between $27,000 and $30,000, although negative momentum signals point to further breakdowns.
The Relative Strength Index (RSI) on the daily chart is heavily oversold, similar to January 24 this year and May 20 last year. However, in a downtrend, the oversold condition can last for several weeks before a price rebound begins.
On the weekly chart, the RSI is more oversold than it has been since March 2020, when a strong rally began. This time, however, long-term momentum has deteriorated, suggesting that the uptrend is limited beyond the upper resistance zone between $40,000 and $45,000.
For now, a relief rally could be short-lived, especially given the strong break below $35,000 last week.
Key Events9am
HKT/SGT(1am UTC): Australian Consumer Inflation Expectations (May).
1PM HKT/SGT(5AM UTC): Japan: economists' survey, current status/outlook (April).
14.00 HKT/SGT(6.00 UTC): UK Trade Balance (March)
CoinDeskTVIn
case you missed it, here is the latest episode of "First Mover" on CoinDesk TV
:UST turmoil continues, Ripple effects on bitcoin, crypto confidence, inflation news, and more.
The crypto market sell-off continued as the algorithmic stablecoin UST failed to regain its peg to the U.S. dollar. "First Mover" had market analysis and the latest developments in the UST crisis.
Guestsincluded Bitwise Asset Management's David Lawant, ADM Investor Services International Chief Economist Marc Ostwald, and Deribit Chief Commercial Officer Luuk StrijersHeadlinesTheLUNA
and UST Crash Explained in 5 Charts:One of the first signs that things were going wrong for Terra came when UST deposits at Anchor began to fall on Saturday
.'$DAI Will Die' Tweet Twisted Back on Terra's Kwon as UST Loses $1 Peg: Terra's UST briefly fell below $6.5 billion in market cap Wednesday morning, making DAI at times the fourth largest stablecoin on the market.
Arrington Capital Removes $100M Anchor Yield Fund From Website After UST Upset: Founder Michael Arrington justified the decision to remove the fund from the company's website, citing decreased demand.
Coinbase's Q1 Revenue Misses Estimate as Trading Volume Drops: The U.S.-based crypto exchange's trading volume dropped 44% from the fourth quarter.
UST's Bitcoin Reserve Comes Too Late to Save Dollar Peg: Luna Foundation Guard's billions of dollars in bitcoin without any actual infrastructure ready, Terra's stablecoin UST vulnerable to a "Soros-style attack," one analyst said.
UST Stablecoin Loses Dollar Peg for Second Time in 48 Hours, LUNA Market Cap Falls Below UST's: The development comes after the Luna Foundation Guard announced that its massive bitcoin reserves will be used to defend UST's dollar peg.
Read LongerBitcoin payments
arestill in their infancy, but there are green shoots everywhere: can cryptocurrencies, stablecoins, and CBDCs coexist as payment? Industry leaders shed light on the future of crypto payments. This post is part of CoinDesk's Payments Week.
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Said and Heard
"Several current and former [Federal Reserve] officials have suggested in recent days that, in hindsight, the central bank should have acted more quickly and forcefully last fall, but that both deep uncertainty about the future and the Fed's approach to setting policy slowed it down." (The New York Times) ... "A recent survey of more than 13,000 companies by Russia's central bank found that many are having trouble getting goods such as microchips, car parts, packaging or even buttons into the country. Shortages of raw materials or parts are forcing some companies to temporarily close their factories or look elsewhere." (BBC) ... "The willingness of individuals to prop up markets during this year's selloff shows the group is more resilient - for now - than analysts and trade experts had expected." (The Wall Street Journal)