What the Bleep is Happening With Terra, UST, and Bitcoin

Just when it looked like Bitcoin (BTC-USD) was going to churn sideways for a while – it crashed 15%, instead…and took a lot of other crypto prices down with it. Let’s take a look at the domino effect that happened here – and what it says about where we go next!

An “Algorithmic Margin Call” at Terra

Remember when Terra (LUNA-USD) bought a bunch of bitcoin to back its stablecoin, TerraUSD (UST-USD)?

It was a pretty cool experiment: Build a crypto (UST) that’s pegged to the U.S. dollar automatically – with an algorithm that rewards Terra’s investors (in LUNA) along the way. Then, when people complain that a stablecoin needs to be backed by more than just an algorithm… Start building a reserve of BTC! After all, bitcoin is “a completely auditable, transparent and decentralized digital asset,” as CoinDesk’s George Kaloudis noted at the time.

The only problem – as we’ve been painfully experiencing these last couple days – is that if the algorithm fails to maintain the dollar peg… You’ve got to dip into those bitcoin reserves to try and fix it.

And yesterday, the Luna Foundation Guard sold all 42,530 of its BTC. That’s $1.3 billion worth of selling pressure…in one fell swoop! All from what was “essentially an algorithmic margin call,” as one analyst put it in TechCrunch yesterday.

Mika Honkasalo, a crypto researcher affiliated with The Block, had been watching the on-chain data all weekend as TerraUSD began to struggle. And as he recounted on The Scoop podcast this morning, Honkasalo “immediately started to see a bit of a different story than just low liquidity and a sudden price move” – which is usually what goes wrong with stablecoins. Instead, he saw “lots of large selling of UST into other stablecoins… The structure of the market had become a lot more averse to UST than it previously had.

“I think what you’re seeing today is that just sort of escalating and going further,” Honkasalo concludes. Not only has the UST stablecoin failed to maintain parity with the U.S. dollar – at one point, it was more like $0.60! – the LUNA crypto has gone from $60 to $30 in one day. Finally, Terra/Luna’s mercurial founder, Do Kwon, has popped up to tweet that he’s “close to announcing a recovery plan for UST.”

Yellen Calls for Stablecoin Regulation This Year

Meanwhile, the whole debacle of not-so-stable stablecoins – just when crypto investors might want them the most – has attracted the lady in charge of the actual U.S. dollar: Treasury Secretary Janet Yellen.

Yellen testified to the Senate Banking Committee today that the “bank run” on TerraUSD “illustrates that this is a rapidly growing product and there are rapidly growing risks…and increased and coordinated regulatory attention is necessary.”

Specifically, “Yellen added that ‘it is important, even urgent’ that Congress pass stablecoin legislation by the end of this year,” as Decrypt reports. It’s been a policy goal in Washington, D.C. for a while – now the tone has gotten sharper.

Now, of course, these economists and politicians have their own reasons for opposing stablecoins like UST – which have no interest in the U.S. dollar system they’re tasked to promote… But Yellen might be on to something.

TerraUSD is, after all, only the #3 stablecoin. The top two, Tether (USDT-USD) and USD Coin (USDC-USD), at least have some claims of being backed by…

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