(Update, May 14, 2022: Lots of educational comments given to this article – much thanks everybody)
Long-time readers of this site know I have not been a fan of cryptocurrency.
This might be a bit of sour grapes on my part since I’ve been writing about Bitcoin since 2011 (yes, when it was still US$10/coin) and wasn’t a fan back then, and still am not today other than strictly the amusement factor of seeing people attempt to trade it.
Back in 2011 when Bitcoin was the only game in town, I wrote the following:
There is also the issue of “counterfeiting”, even if the bitcoin system is technically secure. One problem is that you can create an identical digital currency and call it something different. So in this essence, counterfeiting is a very relevant concern – not direct counterfeiting, but copy-catting. Bitcoin does have a “first mover advantage” which may mitigate against this.
I try not to pay much attention to the sector, but I have been amused to know that many asset managers out there consider cryptocurrency to actually be an asset class that one should keep in their portfolio at some low fraction of assets, like the arguments one would make for holding precious metals. There have also been other developments such as the concept of “stablecoins”, and crypto algorithms that apparently guarantee payouts, etc. I have not kept up to speed on the specifics of the developments and have generally tried to quarantine my brain from it, similar to how I would regarding the trading of Gamestop equity.
But this one really caught my attention – the demise of this cryptocurrency called Luna.
It is my understanding that Luna was tied to another cryptocurrency called Tether (May 14, 2022 edit: Terra), which itself is apparently backed by actual US Dollars in some bank somewhere (audit confirmation pending!). The difference is that Luna apparently pledged that you can get a 20% return by investing it in. Please be warned I could have gotten this completely incorrect, but if it is the case, wow.
So I dredged up a chart of Luna and saw the following:
At one point in the history of Luna, they had a market capitalization of US$775 trillion. Wow. Just wow! Am I reading this correctly? Somebody please educate me in the comments! (May 14, 2022: It wasn’t in the trillions, but in the few tens of billions. Apparently the high number of coins outstanding were automatically created by its algorithmic link to Terra)
What the heck am I doing investing in stocks? Time to go fully into crypto for the next Luna – whether this will be long or short, who knows!
I think somehow the “TerraUSD” is linked to this. TerraUSD (UST) is supposed to be a stablecoin with price of $1 backed by who knows what. Now it’s 17 cents? No one has any ideas how these stable coins are supposed to work.
They issue more coins on demand (or through some algorithmic process with the “stable” pair that might not technically be on demand and which I still won’t be perfectly correct describing, but lets more coins get minted really fast in massive volume), so ~6.497T of that 6.5T circulating supply was issued in the last few days as it went into its death spiral. The market cap (per Matt Levine’s newsletter) was about $26.5B before this all started.
I wish I could be amused by Bitcoin but I’m with Charlie Munger on this one – it is stupid and evil. No one can explain why it has any value without sounding like a lunatic. I think the crypto sector has done some serious psychological damage to a whole generation of investors that will have ripple effects for a long time.
Ultimately, we will have CBDCs and all the other nonsense will be a bad dream.
“It is my understanding that Luna was tied to another cryptocurrency called Tether“
I guess, should be Terra.
Looks like they ran out of money by paying 20% interest on deposits.
Tether is a scam. Listen to this guy ask the CTO why they wont do an audit.
https://youtu.be/kp5kv7aENxw
Great link, thanks for sharing.
The CTO’s supposed reason for not disclosing their assets even though it presumably is in the best interests of the company is…..because they don’t want to. RIght.
The conclusion: They won’t disclose because disclosure is *not* in the best interests of the company.
So either a) there are no assets or b) there are assets but not US Treasuries. In either case, the amount of assets if publicized is not enough to defend Tether against a run.
I’ve been following the crypto segment for entertainment value, but it’s gotten to the point where the amount of $ at stake is non-trivial. A collapse would wipe out $80B of wealth. It’s not a Lehman event, by itself but at the same time, the chain reaction could destroy crypto-sphere itself which would be a Lehman moment.
(Sidenote: even if they have some healthy amount of US Treasuries, what happens if the run happens outside of regular market hours? How can they sell off their bonds/bills?)