The Last Look…
Posted by Colin Lambert. Last updated: May 16, 2022
Stablecoins – discuss. At least I have one ‘W’ under my belt when Galen Stops and I reconvene to assess my 2022 predictions earlier this year! Before we do discuss, however, I want to put on record my appreciation for everyone who supported the first ever Full FX in-person conference in Stockholm last week. It was truly wonderful being in the same room with so many people, having so many great (and different) panel sessions and just having a great time catching up with people. I have already gathered enough for about 10 columns!
No-one will be surprised to hear that alongside “it’s been ages”, the most talked about subject was what was going on with the TerraUSD Stablecoin, which was in full rout mode.
As I have observed before in these pages, there were several willing to suggest that a “clean out” as one person put it, was a long term positive for the crypto industry, which was simply too frothy. Several people asked what may be a pertinent question – ‘if this does turn into a true crypto winter what does it mean for the legions of FX people that have jumped ship to crypto?’ (that very much depends upon where they jumped to), while others, equally predictably, were quick to say that crypto was being found out for the fraud it was.
In other words, no-one’s view of the crypto world really changed – as always seems to happen, the two sides shaped events to suit their opinion!
What I did find interesting was the circulation of rumours on the Internet (how novel!) that BlackRock and Citadel were responsible. The whole argument was played out on social media and garnered sufficient attention that the two firms issued a blunt denial of any involvement to Bloomberg News.
I have no clue whether the firms were involved or not, but given the crypto world so often boasts about its transparency, one would imagine the facts will come out. If they were behind the move, surely that can be proven or disproven? Either way, whatever happened and whoever was behind it, there were accusations being thrown around of market manipulation, but is it? Surely in a freely-traded market, participants can sell as well as buy? Hedge funds in particular need to look out for their investors and earn returns – if they see a weakness surely they have the right to go for it?
A friend pointed out that what was effectively happening was the market went for a peg and sought to break it, which in this instance, it did. How is this different to what happened with the Swiss National Bank? In the interest of balance, how is it different to the numerous failed attempts to break the Hong Kong dollar peg?
The fact is, it isn’t – and as my friend pointed out, if a central bank struggles to sustain a peg backed by a nation’s reserves, how can a single company backed by some dodgy commercial paper and some algorithmic code?
This is an early warning to the crypto industry, which is over-reliant on asset price appreciation – as ‘real’ traders get involved, there will be as much chance of prices going down as up…that hasn’t been the way for a long time now
I actually think that the situation is worse if this was not a planned attack by one or two players. If this was the market more generally breakling the peg, then it demonstrates a lack of belief in certain Stablecoins, which is much more serious. That sort of sentiment is contagious and other Stablecoins could be dragged in.
There is always too much emotion around cryptocurrencies thanks to the entrenched opinions of the evangelists and the sceptics, but what I do find interesting is how the former were quick to cry ‘manipulation’ just because the market went down. This betrays an inherent nervousness (or sense of entitlement if you’re being less generous) in the stability (pun intended) of these coins and, to a degree, crypto in general.
What has happened in my opinion is an early warning to the crypto industry, which is over-reliant on asset price appreciation – as ‘real’ traders get involved, movements will be more violent and there is as much chance of prices going down as up. That hasn’t been the way for a long time now (at least on a sustained basis), so a change in mindset may be required. This then raises the real problem that crypto has to overcome (which I believe it will, but with collateral damage), which is the sole reason and rationale for so many to trade crypto. If we destroy confidence in buy and hold, what does that mean for the market?
Confidence has been shaken, what happens over the next few weeks could be crucial to the immediate future of crypto markets, and could lead to a whole new – and different – market dynamic. It will also, whisper it, probably mean a more mature, robust, market – one that could be attractive to institutions.