🧘‍♂️ALERT: $180 Billion Mystery

Market Meditations | March 1, 2022

Dear Meditators

At the time of writing, Bitcoin is experiencing a rally and trading above $43k. 

This comes despite safe-haven assets such as the U.S. dollar and Japanese Yen picking up a bid and other risk assets experiencing a sell off (S&P 500).

The disconnect has led analysts to believe the rally is due to cryptocurrency demand from Ukraine and Russia. A premium, perhaps, stemmed from Ukrainians and Russians looking for alternatives amid disruptions in foreign exchange markets. 

Today’s Meditations: 

  • Stablecoins 101
    • According to data from The Block, total stablecoin supply is currently at $180 billion
  • eBay Wants a Slice of Crypto Pie
  • Ukraine Turns to Crypto

⏰ Top Headlines


? Balancing Act

Increasingly, we see people losing faith in traditional monetary systems.

This has only been heightened by the current Ukraine-Russia conflict where we are seeing an upsurge in demand for stablecoins. According to data from The Block, total Stablecoin supply is currently at $180 billion. Terra’s UST stablecoin in particular has shown considerable strength. In this feature’s ‘Big Idea’, we explore stablecoins and their appeal. 

Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference, most commonly the US dollar. They aim to offer the convenience, privacy and security of crypto whilst offering the price stability of fiat.

How Do Stablecoins Keep Their Peg? 

  • Fiat-backed such as USDC or USDT: these coins are backed 1:1 by real-world fiat currency stored in a reserve.
  • Crypto-backed such as DAI: these coins use other cryptocurrencies as collateral to maintain a stable value. To provide a buffer against price volatility, crypto-backed stablecoins are over-collateralized.
  • Algorithmic such as UST: these coins do not require fiat reserves or cryptocurrency as collateral. Instead, they utilize complex algorithms to manage the coin’s supply.

More on Algorithmic Stablecoins 

Algorithmic stable coins are decentralized and often associated with some sort of Decentralized Autonomous Organization (DAO) unlike USDT or USDC which are controlled by a centralized authority.

Terra’s native UST coin is a great example as it has recently become the largest decentralized stable coin with a current market cap of $12.8 billion.

  • UST is not backed by dollars, its peg is maintained by allowing users to adjust the supply of UST and LUNA via a mint and burn mechanic.
  • When the price of UST is less than $1, users are incentivised to exchange their LUNA in exchange for a small profit.
  • The protocol burns one UST and mints LUNA, reducing the supply of UST to increase the price.
  • When the price of UST is greater than $1, users can swap $1 worth of LUNA for 1 UST again making a small profit on the difference. The protocol burns LUNA and mints UST which increases the supply of UST thus decreasing the price to the 1:1 peg.

A key concern of algorithmic stablecoins is the risk of a ‘death spiral’ which could occur in bearish market conditions. To combat this, the Luna Foundation Guard (LFG) raised $1 billion in a private token sale which will be used to create a bitcoin-denominated reserve to protect the 1:1 peg of UST. Meaning that in bearish conditions, participants have the option to swap UST to BTC. This will reduce the impact of minting more LUNA which could suppress price further.

Twitter handle @WestieCapital explains the importance of this for Terra’s long term stability in a thread here.

Stablecoins are crucial to the infrastructure of the crypto markets as they allow participants to benefit from the price stability that fiat currency provides. Analysts believe stablecoins such as UST may continue to grow in adoption, use cases and value.


? eBay’s Second Push

Not long after the world’s first Bitcoin ATM went into operation in Canada in October 2013, eBay announced it was considering accepting Bitcoin as payment. Needless to say, it didn’t happen, but eight years later things might be about to change:

  • None of the major e-commerce companies have incorporated crypto payments into their platforms yet.
  • eBay’s CEO Jamie Iannone, in an interview for The Street recently, confirmed they’d been considering crypto integration for some time, and might go official at their Investor’s Day on March 10th.
  • Last year they refreshed their strategy aiming to become the e-commerce platform for Millennials and Gen Z, where anything could be bought or sold, whether physical or digital.
  • Given that the platform manages $85 billion of transaction volume they’re looking for a suite of payment options, and already include Google Pay, Apple Pay, and an Australian method called Afterpay, which allows a “buy now, pay later” approach.
  • Without officially endorsing it, NFTs have already made an appearance on eBay, with more than 1000 art NFTs currently for sale and hundreds more under music and collectibles sub-categories.

Major e-commerce companies accepting crypto would be a big deal for crypto users as it is another way to cut out a traditional fiat bank, similar to crypto credit cards, which we covered here.


? Ukrainians Turn To Crypto

On February 24th the National Bank of Ukraine announced that as a result of martial law they would impose temporary monetary restrictions which include:

  • Suspending the foreign exchange market,
  • Fixing the official exchange rate of the Ukrainian hryvnia (UAH),
  • Limiting daily cash withdrawals to 100,000 hryvnias ($3,350) and
  • Suspending the issuance of electronic money (fiat money in a digital form).

Due to the war, the people of Ukraine cannot effectively access their own finances. Because of this leading Ukrainian exchange, Kuna has seen a surge in user activity as people look to crypto and in particular, stablecoins for answers.

The price of Tether’s USDT stablecoin is trading at a premium as a result. On KunaUSDT/UAH is trading at 32.00 ($1.09) and on Binance Ukraine the same pair is trading at 31.01 ($1.07).

A premium of an asset occurs when the demand for the asset exceeds the supply. The people of Ukraine seem to have lost faith in their own monetary system and are using the infrastructure put in place by cryptocurrency to protect themselves. 


Twitter

  • Today Bitcoin had the largest daily candle in percentage terms in over a year – Will Clemente
  • This moment in Crypto feels a lot like March 2020 – Back then we threw the worse possible news at it (a pandemic and a global shut down) and it fell very sharply but failed to make a new low. Back then BTC turned up 10 days before the NDX. But bonds led Crypto (Thread) – Raoul Pal

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??‍♂️✍️ Stories in this newsletter were written by Isambard FAKai.A, Nick T., Max P., Kimia K., Ellen B. and Koroush AK. Graphics were produced by Ellen B.


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