Let’s start this weekly post where we left off last week, namely in the saga surrounding the complete crash of the LUNA token and its parallel “stable” token UST. If you are not aware of the happenings, we strongly recommend that you first visit our message from last week to fully understand the following.
A week later, the timeline of events is now clearer. During the first weekend of May, as the stablecoin UST showed its first signs of instability after falling from its peg to the dollar at $0.985, Luna Foundation guard, the nonprofit organization charged with overseeing the health of Terra’s ecosystem, voted to deploy $1.5 billion in bitcoin and UST from its coffers in an effort to re-peat the UST to the dollar. This was the activation of a planned contingency plan in light of such a scenario, where the foundation had amassed $3.5 billion in treasury consisting of bitcoin, avalanche, LUNA and UST. The goal was to use this capital to buy massive amounts of UST, creating buying pressure that, according to the logic of the system, would drive the price of UST back to $1.
The next day, however, the UST continued to fall. On Tuesday, when UST’s price hit catastrophic lows, LFG’s reserves were already virtually depleted. Indeed, there are two transfers during this period, the first of 52,189 BTC to Gemini and another of 28,205 BTC to Binance. Unable to confirm beyond any doubt that these tokens have indeed been sold to buy UST, but bearish pressure on BTC price over the past week suggests so. This is what the foundation’s reserves looked like on Monday:
Nothing worked. At the time of writing, a token from LUNA, whose amount has increased by 1,893,380% by the logic of the algorithm, is worth less than 2 hundredths of a cent. The UST is far from its assumed guaranteed dollar value as it is currently trading below USD 0.10.
Is it the death of LUNA and UST that were in the top 10 projects in terms of capitalization a few days ago? Certainly in terms of tangible value and reputation if you ask us. However, the project founder and the foundation did not necessarily have the last word. Indeed, a vote on a plan hard fork suggested by co-founder Do Kwon State at the time of writing. The plan? Split the current string in half. The goal is to enable purists to preserve the current, collapsed blockchain, which will now be called “Terra Classic”. The native token is the LUNA Classic (LUNC). The new chain will distribute 1 billion LUNA tokens to developers, UST holders and those who owned or deployed LUNA or its derivative projects before the stablecoin price fell. The redistribution includes vesting schedules and token locks for most LUNAs, ostensibly to avoid a steep drop in price as Terra figures out how to proceed without UST in its new protocol. indeed, the stable currency would be abandoned entirely for the sequel.
The approach will remind longtime cryptocurrency enthusiasts of what once happened to Ethereum and Ethereum Classic.
While there is a good chance that the proposal will indeed be accepted (yes has 76.38% of the vote at the time of writing), it is naive to think that market forces will agree to erase the episode of the last ten days and a assign real value to the tokens from one or the other of the chains. In fact, that would be downright disturbing. No offense to investors who are sure to take a hard hit right now, a serious industry cannot and should not place value on a simple wave of a magic wand. In addition, if this were to happen, it will be without the help of the Terraform Labs legal team. Advisory team members Marc Goldich, Lawrence Florio and Noah Axler all retired from work for the company in May, according to their LinkedIn profiles. Many employees have also jumped from the ship in recent days.
In return, the market was no doubt reassured by the success of the Tether token (USDT) in regaining its peg to the dollar. However, this will not happen without a mass exodus of retainers. $7.7 billion from stable currency were withdrawn, resulting in a 7.8% decline in market capitalization over the past seven days. It currently stands at $74 billion. Some investors rushed to exchange their Tether for another stable currency Popular US Dollar USD Coin (USDC) on the grounds that USDC has been audited and is already fully backed by cash and US Treasury bonds. Tether claims the same, but there has always been doubt about the correctness of the company’s reservations.
Among other news of the week, recent data shows that China is not exactly absent from the bitcoin mining industry, having been completely banned last year. Indeed, according to data from the Cambridge Digital Assets Program (CDAP), China has once again become a major center for bitcoin mining, with underground miners accounting for more than a fifth of the network’s hash rate. The report suggests that a significant portion of China’s bitcoin miners have found ways to adapt to the ban, using foreign proxy services to hide mining activities, rather than leave the country. The new data shows that China now accounts for 21% of Bitcoin’s hashrate, second only to the United States, which generates 38% of the network’s computing work. “As the ban is entrenched and time goes by, it appears that illegal miners have gained confidence and appear satisfied with the protections provided by local proxy services,” the CDAP report states.
Once the hurricane is over, we can now see the state of damage over the past week. $1.2 billion in bitcoin derivatives were liquidated in last week’s carnage. According to data from Coinglass, more than $1 billion of all crypto assets was wiped out on May 8 alone — the highest figure in more than three months. Bitcoin has also recorded a seventh consecutive bearish week, a record that dates back to 2014.
US stock markets appear to have stabilized this week. Could conditions finally be conducive to some recovery for bitcoin? Analysts are divided on whether bitcoin has bottomed out. Will Clemente, principal analyst at Blockware, said he thinks the asset has likely hit a “multigenerational” price floor based on multiple indicators, including a “realized price” that is fast approaching. The realized price is the average base cost of all bitcoins purchased to date, last visited for a short period in March 2020. Raoul Pal’s analysis agrees, explaining that with the action on the price drop last week, bitcoin may have “pulled straight down” at the base of the current technical formation and is now in a range that will eventually lead to another price rally. “That’s exactly the kind of model we had in March 2020.” A hint Crypto Fear and Greed fell to 8 on Tuesday, which is the lowest since March 2020.
No inflation protection? The famous Anthony Pompliano took the liberty of putting everything into context yesterday: “Bitcoin is up 340% since March 1, 2020. While central banks around the world have devalued their currencies at a historic pace, only one asset stood out. #bitcoin is the savings technology that protects billions of people from unmanageable monetary policy.”
So far, however, the market trend remains highly correlated with US stock indices and inflation fears. Comments from the Fed’s Jerome Powell yesterday, confirming continued pressures on financial conditions until inflation shows signs of easing, pushed bitcoin back below $30,000 and led to an open in the stock market red today. Either way, it’s when investors get desperate that historically the best opportunities to enter the market have emerged.
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