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Crypto Weekly: Neither the market nor stablecoins are stable

Mads Eberhardt

Cryptocurrency Analyst

Summary:  The crypto market has plunged over the past week with Bitcoin and Ethereum down 12% and 14%, respectively. However, these are not the only ones not being stable, since the stableness of the largest decentralized stablecoin is questionable, potentially causing systemic risk. What is stable, though, is the International Monetary Fund’s negative view on crypto. Its view has likely prevented Argentinian banks from offering crypto services.


The crypto market sees red

The crypto market saw red last week due to fatigue in the market. Opening last week at 38,300 (BTCUSD), the largest cryptocurrency Bitcoin has since tumbled around 12% to its current price of 33,700. The second-largest cryptocurrency Ethereum followed suit by decreasing 14% in value from 2,850 (ETHUSD) to 2,450 over the past week.

The fatigue of the crypto market is highly related to the fatigue of other asset classes such as equity, particularly technology stocks. For 2022 so far, investors have been realizing risk-off by liquidating risky assets. Since the crypto market is one of the more speculative and risky assets, it has been clear that by liquidating crypto, the risk of one’s portfolio would be better balanced. Because the crypto market has been correlated to the equity market a whole lot this year, crypto has neither acted as a hedge, fundamentally weakening the store-of-value narrative of Bitcoin.

On-chain analysis from Glassnode suggests that the sell-off of crypto might continue, given that the inflow of Bitcoins to exchanges has drastically picked up in volume. When holders send Bitcoin or for that matter, other cryptocurrencies to exchanges, it is often a sign of weaker hands, as by having the funds directly on an exchange, the holder can quickly liquidate the funds. Similar to other assets, the current state of the crypto market is framed in fear upon countless uncertainties, including the invasion of Ukraine by Russia, decade-high inflation, increasing interest rates, and commodity shortage. Even without countless uncertainties, the fatigue in 2018 following the 2017 bull market was worse in terms of price declines than what the market has experienced this time around, so if it is comparable, this plunge might yet get worse. On the other hand, one swallow doesn’t make a summer, in that the crypto market is now more mature than in 2018.

For a moment, the largest decentralized stablecoin was not that stable

To protect users and investors from the volatile nature of cryptocurrencies, cryptocurrencies pegged 1-to-1 to mostly USD known as stablecoins were launched. The largest stablecoins are pegged to the dollar by the issuer having an equal amount of reserve in USD in bank accounts or other dollar equivalent assets. However, since the decentralization of these is questionable, multiple projects have launched somewhat fully decentralized stablecoins, including Terra and MakerDao.

The largest of those two Terra and its stablecoin TerraUSD worth $18.6bn has long been the subject of criticism. Many believe that Terra’s algorithm to keep it stable might not be sustainable long-term, particularly under harsh market conditions, as some of the collateral of the stablecoin is among other things based on the foundation’s Bitcoin holding. This means that TerraUSD and therefore, the whole crypto market is subject to systemic risk potentially caused by the Bitcoin price. It seems some traders wanted to exploit Terra as a house of cards this weekend by selling TerraUSD worth almost $300mn in a matter of hours. At one point, TerraUSD traded as low as $0.98 but recovered partially over the next 24 hours. TerraUSD currently trades at $0.995. Even though TerraUSD did not significantly de-peg from USD for a long time, the present algorithm of TerraUSD is not genuinely encouraging.

With the power of IMF, Argentina says no to crypto

The International Monetary Fund (IMF) has once again clashed with crypto. When the IMF approved a $44bn extended debt plan for Argentina in March this year, IMF stipulated that Argentina had to discourage the use of cryptocurrencies. It seems that Argentina’s Central Bank is meeting this stipulation because it prohibited banks from offering crypto services last week. The prohibition comes only days after two large Argentinian banks started offering crypto trading, an offering they will ultimately have to roll back now.

Bitcoin/USD - Source: Saxo Group
Ethereum/USD - Source: Saxo Group
UST / USD. Source: TradingView, Coinbase

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