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Cryptocurrencies have their ‘Lehman brothers moment’

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FTX's fall has set the dominoes falling across the industry, with several major companies having filed for bankruptcy protection

Despite the crash of cryptocurrency stablecoin ecosystem, retail investors still see the contraction of currencies like Bitcoin as an opportunity

As billions of dollars of value are wiped off cryptocurrency markets worldwide, retail investor strategies are diverging from those in the institutional space — the former senses cheap assets, while the latter worries of a “Lehman Brothers” moment for the industry.

On Thursday, Bitcoin fell to its lowest price in 12 months, and the second-largest crypto Ethereum also dropped precipitously. 

But the greatest casualty by far — and simultaneously the cause — of the recent collapse in prices was the extinction of TerraUSD (UST).

UST is an algorithmic stablecoin formerly pegged to the value of the US dollar via another cryptocurrency, LUNA, which used an algorithm to burn or mint to maintain the value of UST. 

Sales of $265m worth of UST triggers sell-off

This week’s collapse was triggered by an anonymous attacker selling off $265m worth of UST, triggering a mass sell-off and collapse in the value of UST and LUNA, the latter of which was worth $81 a week ago — but now is worthless. 

On 13 May various crypto exchanges, including Binance — the UAE’s largest exchange — ceased trading in UST and LUNA. The currencies switched off their blockchain, ending them for good and eliminating all value.

This, Christopher Flinos, chief xxecutive officer of digital currency broker HAYVN, told AGBI, fundamentally undermined the technology that investors had once touted as the future of mainstream investing.

Flinos said: “On the May 10 and 11 2022, the DeFi [Decentralised Finance] cryptocurrency sector had its ‘September 15.’ DeFi, the financial infrastructure of tomorrow, failed today.”

He said: “The reason HAYVN flagged it as a ‘Lehman moment’ is that this is the moment the financial system has seen that parts of the cryptocurrency ecosystem are broken.”

“What shocked us most about the Terra network’s collapse in three days was that it was a top-five coin — it was an algorithmic stablecoin and it all went wrong.”

Flinos explained that the smart contracts underpinning the currency failed, and the markets had not priced in a spiral that could destroy it so quickly.

“And yet we had put so much faith in it,” said Flinos. “This isn’t a ‘buy the dip’ moment — the system failed.” 

But while institutional investors are reassessing the stablecoin ecosystem, retail investors are still seeing the contraction of established currencies like Bitcoin and Ethereum as an opportunity.

In a widely shared social media post, Dina Sam’an, founder of Bahrain-licensed crypto exchange CoinMENA, said: “Despite the market downturn, the long-term trend and outlook for crypto remain very bullish … think long term: The best investors in the world think in years, not days or months.”

She blamed two years of central bank stimulus and low interest rates for pumping up asset prices — a fiscal free-for-all that now appears to be coming to an end, as inflation spikes near-universally and central banks hike rates.

But Flinos disagrees: “Many in the market will say: ‘buy the dip. It’s a great buying opportunity’ — but I think that is incorrect.”

The differing perspectives highlight a fundamental difference between institutional investors and those on the retail side.

Flinos said: “Those of us who are interconnected at an institutional level, handling hundreds of millions, were having Lehman Brothers discussions on Thursday.”

Despite the market downturn, the long-term trend and outlook for crypto remain bullish

Dina Sam’an of crypto exchange CoinMENA

But in retail markets like the UAE — where, according to Gemini, one in three are invested in cryptocurrencies — he said, “nobody was having those discussions.”

While some may see an opportunity in crisis to purchase cheap cryptocurrencies, Monsur Hussain, head of research, global financial institutions at Fitch Ratings, explained that UST’s collapse is likely to herald the end of blind faith in algorithmic stablecoins which, unlike other stablecoins, are not backed by assets.

“Without a central bank-backed lender of last resort you are relying on private backstops. You are relying on stablecoin issuers really having the funds they say they have to back up the currency when they need it.”

UST “did not have the reserves to defend the peg, and it has now all but vanished.”

“Unless people have very short memories, this probably will sound a death knell of sorts to algorithmic stablecoins, because it will focus attention on whether or not there is a real fiat, or uncorrelated reserve, backing these tokens.”

But while the global cryptocurrency industry has been shaken by the last week’s losses, Hussain said that he did not see the UAE — which has been a “trailblazer of sorts” in attracting blockchain-based businesses — straying from its embrace of the tech.

“It isn’t going to change their medium or long-term strategy,” he said, instead “it will give food for thought on how to handle potential runs on stablecoin issuers.”

The UAE’s regulators “will need to digest the developments and review whether or not existing arrangements — which essentially treat stablecoin holders as a sort of pre-payment, stored value card — If that is sufficiently robust to handle systemic contagion, should it arise.”

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