The current crash has killed the dream of a new monetary era
Only a few months ago, crypto advocates were making wild proclamations about a looming monetary revolution. Bitcoin would reach $100,000, $500,000, maybe even $1,000,000, granting holders “financial freedom,” while VCs on social media touted NFTs (non-fungible tokens) as a rebellious alternative to dubious subprime-era CDOs — pools of risky loans packaged together and sold on to investors. What could go wrong?
Everything, as it turns out. Because those same declarations now appear foolish. To anyone who’s studied previous financial manias, it should not surprise them that crypto has proven itself to be simply the latest speculative bubble. Along with other underperforming crypto funds — like Cathie Wood’s ARK Innovation ETF (down 56% year-to-date), cryptocurrencies have tumbled: even Bitcoin has plunged roughly 40% in 2022. It dipped 5% just yesterday, following a sky-high CPI (consumer price index) print of 8.3%, once again disproving Bitcoin as an “inflation hedge.”
Bitcoin’s sharp decline, however, has been merely a sideshow to the main exhibit: the ensuing collapse of crypto’s latest notable contraption: Terra ($UST), an “algorithmic stablecoin.” Using an “arbitrage mechanism” involving its sister cryptocurrency, Luna, market participants in theory would be incentivised to maintain Terra’s $1 “peg,” thereby creating a currency with a stable unit of account (i.e 1 UST always equals 1 U.S. Dollar).
Yet to the shock of Terra holders, its $1 peg snapped under the immense pressure of the latest crypto market selloff. It was only two weeks ago on Twitter that its founder Do Kwon proclaimed Terra would “open a new monetary era of the Bitcoin standard” that’s “easier to spend” and “more attractive to hold.” Still, the stablecoin fell as low as $0.30, while its sister token Luna nosedived from $82 to — wait for it — 15 cents!
Crypto advocates are slowly realising why legacy power structures and their systems exist and, despite various bailouts and trading shenanigans, why the masses still prefer traditional finance over crypto. Proving once again that holding a computer science degree does not grant you automatic financial expertise, crypto bro Emin Gün Sirer laid out his thoughts on the Terra fiasco: “I have always said that [algorithmic stablecoins] are subject to bank runs,” he tweeted. “The only mechanism against this is a strong, active team that performs open market operations,” and in doing so, unintentionally described the main function of crypto’s boogeyman: central banks.
While crypto bros cling to the unrealistic dream of separating state institutions and money, the general public has even more reason not to engage with the crypto. It’s about to get worse, not just for Do Kwon and the crypto space, but for all financial assets high on the risk spectrum.
With interest rates way above their recent historical average, the crypto collapse is likely just the start, not the end, of a wider reckoning. If you think keeping up with the latest crypto chaos has been a strenuous task, wait until it finally snaps.
Greg Barker is an independent journalist and quant, who also writes under the name Concoda. You can find him on Substack and Twitter at @concodanomics.