Crypto Carnage

This week was without a doubt the most brutal week for cryptocurrencies since we became involved in the space over three years ago.  There is a myriad of reasons that we will go over here and hopefully help explain what’s going on in this still maturing industry, one that faced some serious challenges this week,


The biggest catalyst for the meltdown this week was the de-pegging for the TerraUSD stable coin, which is an algorithmic stablecoin, meaning it uses a complex combination of code, trader incentives, and smart contacts to maintain its peg to the dollar.  Not traditional assets like treasuries or short-term corporate paper.  This week it “broke the buck” badly and took Luna down with it as they were partners, if you will, Luna fell a stunning 99.9% this week and is essentially worthless while Terra still hovers around $.26. – well below the $1 peg and has been halted several times this week.  Essentially, the perfect example of a death spiral.


This incredible move has deeply shaken the confidence in the crypto community and has led to forced (margin) selling in Bitcoin and Ethereum – both down double digits this week even with the bounce today. Tether, who is also pegged to the dollar, but backed by more traditional assets also briefly broke the buck but has steadied itself back to the $1 level as of today.  It’s fair to say that Tether maintaining its peg will be crucial to confidence in the coming weeks.


If the largest stabelcoins can’t hold their values, that will quickly eat away at any confidence in the whole DeFi system everyone is so sure of as being the next frontier in finance.


To add insult to an already very serious injury, Coinbase, the premier marketplace for crypto, reported a simply awful quarter on Tuesday.  They missed estimates by a stunning $2.82 and disclosed revenues had fallen 35% year/year.  Their monthly transactions users (MTU) dropped, and guidance was hardly inspiring, all leading to a 20% drubbing the following day for a stock that was already down 79% YTD and 83% since its IPO in 2021.  The company also disclosed that in a bankruptcy event, customer accounts would be treated like general creditors, which didn’t sit well with shareholders, nor did it help abate liquidity fears.


On a positive note, Coinbase did stage a nice upside reversal off the lows on the 12th, which hopefully signals the bottom there and the start of a move higher.  We shall see.


But it’s hard to imagine a worse week of news than this.  Let’s hope not at least.  As always, a crisis creates opportunities for those with steadier hands, low-to-no margin, and capital to deploy.  There is a very good chance 90% of the altcoins will eventually go away.  But that doesn’t mean they aren’t tradeable in the intern.  Also, the forced selling, which will not likely abate anytime soon, in Bitcoin and Ethereum, are generating some interesting entry points.  The same could be said for some of the blockchain equites such as Riot Blockchain, Marathon Digital, and Hut 8 Mining, along with the abovementioned Coinbase.


But let’s not whistle past the crypto graveyard, and this week there literally were some graves created.  It has been a horrific week for anyone bullish cryptocurrencies.  There are some real questions to answer on how pegs can be broken that easily and how Luna can essentially vanish in a few days’ time.  We have often written that this area is still young (14 years) and needs to mature. Well, this week it took a huge step backwards.  Right as the institutional side was becoming more comfortable.  It remains to be seen if and how crypto can bounce back from this but it better or all the hope and promise of change and new world order will be escorted out of the room for good. The burden of proof squarely sits on its shoulders and the world is watching.


Bitcoin has survived: Silk Road, Mt. Goxx, government bans (China), and increased scrutiny from regulators. Chaos is a characteristic attached to this still young concept.  But bitcoin continues to produce block after block of transactions despite it all, while the world slowly transforms how it conducts business.