© Investing.com
By Geoffrey Smith
Investing.com — The cryptocurrency world has survived a scary week, but the danger is not over.
The seemingly unstoppable momentum of the past two years has reversed dizzyingly, with the falling tide of cash showing who – in Warren Buffett’s phrase – has been swimming naked.
The “algorithmic stablecoin” TerraUSD and its ecosystem, which has attracted $80 billion in outside money by promising returns of 20% per year on a token basis, collapsed last week as early adopters rushed to the market. out and leaving latecomers to hold the bag, leaving behind the usual trail of destruction and misery of a Ponzi scheme.
Do Kwon, the Korean-born Stanford genius who pioneered the concept of TerraUSD, unsuccessfully sought support from his “community” on Tuesday, proposing to insert a “fork” into the underlying blockchain to effectively restructure the claims of all those who still hold their worthless currency – sorry, “classic” – .
The answers (with a few honorable exceptions) boil down to one stark message: Fuck you.
Kwon’s mathematical skills are indisputable. But the lack of common sense behind the Terra system defies belief.
At the heart of the system was the promise to redeem various forms of digital currency on demand for real, hard US dollars. Yet the assets backing the system were not dollars, but – for the most part – an asset whose near-perfect correlation to high-beta profitless tech stocks has been clear for years. Any situation stressed enough to trigger a surge in demand for redemptions must – almost by definition – have also killed the value of its reserves.
It’s as if, in 2002, Argentina’s central bank took dollars from the IMF to create a peso peg and then swapped them for Brazilian debt for carry.
Of the more than 80,000 bitcoins held by the Luna Foundation Guard – a group of investors around Do Kwon – while Terra parity was still in effect, only 313 remained as of Tuesday. The rest was wasted trying to defend the peg, much like the Bank of England in its failed efforts to defend the pound 30 years ago (or any of the Asian central banks during the 1997 crisis) .
The irony of what happens to a community that can’t speak without laughing at traditional finance (Kwon himself had said with a smile to an interviewer just two weeks ago that “there’s watching businesses die”) couldn’t be more perfect.
It is not known exactly who succeeded or failed to withdraw their money from Terra in time. Unconfirmed reports have suggested foul play, pointing to a number of large block transfers from LFG-controlled accounts, but these claims have been debunked, cannot be verified, and the self-reinforcing dynamic of a bank run would be explanation enough anyway.
And a bank run, in slightly modified form, is the most likely risk currently facing an asset of far greater importance to global financial markets.
For most of recent history, Tether was the world’s most important stablecoin – a digital asset whose value was pegged to the dollar. Its main purpose has been to serve as a parking lot for digital currency between speculation in cryptocurrencies or other digital assets such as non-fungible tokens.
Tether’s market cap peaked at over $83 billion just 10 days ago. However, it has steadily decreased since Terra’s disappearance. By late Tuesday in New York, its market value had fallen to $75.6 billion.
Much of this decline is due to the natural contraction in global Tether supply as speculators trade their crypto assets for cash.
However, it became clear following the Tether crash mid-last week that there was more at stake than that. Some did not believe in the ability of Bitfinex, the owner of Tether, to pay.
Tellingly, while the market capitalization of Tether has shrunk, that of and Binance USD, which play a similar role in their respective ecosystems, have increased by around $5 billion in total. Cryptocurrency speculators show a clear preference for them over Tether.
This is hardly surprising, given that Bitfinex, the owner of Tether, was fined $43 million by US regulators last year for lying for three years, through 2019, about this. which actually backs his stablecoin. The last certification by an accountant from Tether’s reserve is five months old, and was given by MacIntyre Hudson, an accounting firm based in the Cayman Islands.
By comparison, Circle, which manages USD Coin, has its reserves audited monthly by Grant Thornton in the United States, and holds them entirely in cash and Treasury bills. It also uses Bank of New York Mellon (NYSE:) and Blackrock (NYSE:) as custodians, according to a blog post from Circle CFO Jeremy Fox-Green.
Tether hit its lowest level last week at 93.35c, before returning to parity with the dollar this week. Its technical director, Paolo Ardoino, maintains that it has never been necessary for holders to accept less than a whole dollar due to what he calls Tether’s “secret sauce”, in reference to its reserves. . But there is no better sauce than transparency, and secrecy adds nothing good to the taste.
The reserves of Tether are, without question, of better quality than those of Terra. More than 43% of them are made up of US Treasury bonds or cash and equivalents. A larger share is held in money market funds which should be low risk.
However, more than a third is held in the form of commercial paper, i.e. short-term corporate debt, and Tether does not give a more detailed breakdown of the promise of payment that is hidden. rear. Mr. Ardoino did not respond to multiple requests for clarification from Investing.com.
Anyone present in 2008 will remember the spectacular explosion of commercial paper as an asset class, as the quality of the underlying assets – subprime loans – were brutally stripped bare by rising interest rates .
Interest rates are doing the same today. If there are any credit risks in Tether’s wallet, they will soon come to light.
Tether holders be warned!