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Posted May 13, 2022

Sean Ring

By Sean Ring

The War on Terra

  • If you think the Nasdaq is bad, try some crypto coins.
  • Terra, and its sister currency, Luna, are worthless.
  • If you put $10,000 in Luna two weeks ago, today youd have $2.

Happy Friday, my friend!

I dont know about you, but Ive had a busy week.

Between running around getting all our new documents and cards together, watching the market carnage, and trying to get Micah to behave even a little bit, its been crazy.

And while my coffee soothes me this morning, I cant wait to pop the cork on a bottle of Barbera dAsti this afternoon.

Barbera? Not Barolo? Or Barberesco?

Its funny, but I observed most people drinking Barbera here in the bars and cafes.

Barbera is delicious and made right around the block, so I can see why.

Its a high-quality wine that comes at a lower price than its more famous Piemontese siblings.

And while thats a perfectly happy circumstance when it comes to wine, Im pretty sure it doesnt translate to crypto.

This week, Luna, one of the darlings of the crypto world, now trades at under $0.01.

During the first week of April 2022, it traded at $115 per coin.

Luna is a perfect example of the dangers of the crypto world.

Thats not to say all crypto is this dangerous. Its more of a warning about any currency not named Bitcoin or Ether.

Lets look at what happened, and why the crypto world is in such a precarious state right now.

In General, Tech is Out of Favor

Lets go through a few charts to see just how dire the situation is for tech right now.

The Nasdaq shows no immediate sign of imminent recovery:

Bitcoin, though recovered from under-$30,000, is still in a technical mess:

Its the same story for Ether:

Coinbase is the largest cryptocurrency trading platform. For now.

This is Coinbase stock after the company revealed it could confiscate customer coins to pay its own debts in the event of a bankruptcy proceeding:

And everyones favorite Bitcoin proxy stock, Michael Saylors MicroStrategy, has been decimated:

What are Terra and Luna?

Well, if you think those are bad, try Luna:

Yes, thats a coin thats trading under $0.01.

At the beginning of April, it was trading at around $115 per coin.

What the heck happened?

Ill try to explain this in the simplest terms I can.

After all, its Friday!

Breaking the Buck

A big no-no in the money markets is breaking the buck.

If a money market fund falls below the value of $1, it has broken the buck.

Rich folks stick their cash in money market mutual funds to earn a bit more than they would on their savings. They can also withdraw the money quickly should they need it.

They dont mind earning a small return, but they never expect to lose money.

After all, that money is invested in things like treasury bills (short-term US Treasury paper) and commercial paper.

Commercial paper is like t-bills, except companies with excellent credit issue them to cover their short-term costs.

So theres practically no risk; hence, no expectation of any losses.

Stablecoins

In the crypto world, the equivalent of money market funds is the stablecoin.

Stablecoins are tethered to the USD, and their value should fluctuate only in a very narrow band around $1.00.

The safest way to do this is to keep the equivalent number of dollars and stablecoins.

But as its expensive to keep all that cash doing nothing on your balance sheet.

So instead of keeping those dollars, coders write algorithms to maintain the peg.

In TerraUSDs case, this stablecoin looks remarkably similar to the Hong Kong Dollar peg to the USD.

In the HKDs case, if the value of the HKD falls too far against the USD, the Hong Kong Monetary Authority steps in to sell USD and buy HKD.

If the HKD gets too strong against the USD, the HKMA sells HKD to buy USD.

That way, the value of the HKD is always maintained.

Unfortunately, TerraUSDs algorithm couldnt handle a good old-fashioned run on its currency.

To be fair, no currency can. (See: Asian Currency Crisis of the late 90s.)

TerraUSD (UST), which should trade at $1.00, was trading at $0.33, far worse than what happened during the financial crisis of 2008.

Investors flipped out when the money market funds were trading at $0.97.

USTs Sister, Luna

As David Niven once wrote, The Moon is a Balloon... that just popped.

Luna, USTs sister coin, suffered catastrophic losses in the wake of TerraUSDs demise.

From $115.00 to $0.01 in six weeks?

Its a staggering blow to those who had invested in Luna or kept their powder dry in UST.

This also knocked Bitcoin for a loop, as the Luna Foundation Guard is holding bitcoin as a reserve.

The fear is that the organization may have to sell its bitcoin to support the UST peg.

The Bigger Picture: Confidence

There are many more bells and whistles that go with UST, LUNA, and the entire DeFi (decentralized finance) industry.

The machinations are for another day.

But one thing even DeFi cant escape is confidence.

Ultimately, I may think the USD is a crap currency.

But the markets violently disagree with me right now.

Why is that?

Because the almighty dollar is backed by the ingenuity of its people, overwhelming military force, and tax raising.

Heres the Dollar Index over the last 14 months:

Sure, its not a massive increase in value.

But currencies arent meant to swing in huge roundabouts.

Theyre supposed to be stable so entrepreneurs, families, and investors can confidently project into the future.

You simply cant make plans when your currency is bouncing like a fat kid on a trampoline.

That is the crypto worlds biggest problem.

While I think governments dont know what theyre doing in terms of money, cryptos volatility means I cant know what Im doing if my projects are priced in those coins.

Wrap Up

This doesnt mean I dont think you should hold a wee bit in crypto.

Holding 5% of your portfolio in Bitcoin or Ether, while it wouldve hurt over the past few months, will allow you to benefit from any big pop in those currencies.

But Id avoid the smaller, lesser-known crypto names.

Theyre just too risky for anyone looking to enjoy retirement and provide for their family in the near future.

One last thing to consider: as tech is so out of favor with investors right now, it could be a good time to start doing your crypto homework.

In any event, have a wonderful weekend!

All the best,

Sean

 

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