It’s been a bit of a scramble in the arena of selling cryptocurrencies to the general public, public relations-wise, over the last month. WaPo covers a couple of points:
Yet that digital coin, a type of crypto known as a stablecoin because it aims to keep its price at $1, has been in free-fall this week. TerraUSD, or UST as it is known, was priced as low as 30 cents on Wednesday and was trading around 40 cents Thursday evening (crypto trades around the clock).
It isn’t clear yet what sent UST into a tailspin. But the cratering of what had been the third-largest stablecoin by total market value points to a wider reckoning for a hype-fueled asset class that is deflating as dramatically this year as it inflated in 2021.
It gets worse.
A sell-off over just the past seven days has erased more than a quarter of the value from the global crypto market, according to CoinMarketCap. Most dramatically, UST’s sister coin, Luna, lost almost all of its value in the past week, all but wiping out most people who had invested in it.
And they’re not supposed to be investments for most people. They’re supposed to be currencies. Yes, words matter. The fact that Luna can fall to zero suggests it, and its brethren, are not immune to manipulation.
But here’s what worries me:
Institutional players have overtaken retail investors on Coinbase [the largest U.S.-based crypto trading platform], for example. Mom-and-pop traders accounted for a third of the volume on the platform last year, down from 80 percent in 2018, according to new research from Morgan Stanley. And Wall Street firms continue edging into the sector. Goldman Sachs in March executed its first over-the-counter trades of bitcoin options; BlackRock last month announced it is investing in the stablecoin company Circle Internet Financial.
And if everything goes kaplooey?
Remember Long Term Capital Managment? Maybe not. Back in 1998, this hedge fund, using work by several Nobel Prize winners, went right over the ol’ financial cliff, after some initial successes. But when many of us expected the wealthy investors who were using it to become more wealthy to, instead, lose their shirts, well, let’s have Wikipedia tell us:
LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve. The fund was liquidated and dissolved in early 2000.
Which leads to this question: If these big institutions cited as becoming movers and shakers in cryptocurrency find it suddenly becomes little more than rainwater in an asbestos gutter – will they be running to the Federal Reserve or the Federal government, gnashing their teeth, beating their breasts, and wailing to be bailed out?
How big is that going to be?
And how are these institutions going to learn to stop being foolish if their fingers aren’t burned? I know, I know, Lehman Bros was the sacrificial lamb in 2008, meant to learn them darn competitors of their’s.
Will the banks have to eat those losses if they occur?
And that’s what I fear in light of this, from the WaPo article:
Tyler Gellasch, founder of the nonprofit Healthy Markets Association, said traditional financial institutions have missed too many years of booming crypto values to be dissuaded from the crypto market now. “Concerns over fraud, volatility, and regulatory uncertainty kept many traditional financial firms on the sidelines for the boom in digital assets,” he said. “After several years of missing out on the profits, many in traditional finance have just recently committed to getting involved in digital asset markets. I’ll be surprised if they immediately U-turn now. They’ve committed too many resources to figure out how to offer something to their customers.”
If that’s not emotional manipulation, I don’t know what is. At best, it’s foolish. At worst? Use your imaginations.
