Hecatomb in the cryptocurrency markets, while Bitcoin has fallen about 20% in May alone. The story is the same as in recent months. The cryptocurrency market retains its strong correlation with North American stock indices, particularly the NASDAQ Technological Index. While the latter is at a low price for the year, bitcoin is doing the same. Many were hoping for inflation figures that showed encouraging signs in the US this morning. However, the data still show that inflation is stronger than expected, cutting off what appeared to represent a recovery tomorrow. This is at least the case at the time of writing, before the market opens. However, volatility is higher than ever these days.
As we have access to several dozen cryptocurrencies in the composition of the fund, we are excited to demonstrate the strength of our active management approach by finding positive deviations and taking advantage of upside opportunities. However, this opportunity for the team came at a time that was, to say the least, gloomy for all markets. Active leadership sometimes behaves with defensive positions when everything goes sour. This was the attitude to Rivemont Crypto Fund, where between 60-70% of the cash has been in cash after sales around the $ 38,000 and $ 39,000 level for the majority of the week. We took a small preliminary stance back to long-term support after the majority of the fall. Certainly, the losses were greatly reduced compared to the bitcoin index for investors.
While such a setback always brings massive panic, those who have been in the cryptocurrency world long enough know that these are often the times when the biggest opportunity zones exist. Do we need to remind you that this is far from the first time that bitcoin has suffered such a setback, and that each time it was for the better to go to new heights? The asset has been the best performer of the past decade despite these numerous setbacks.
It is the long-term vision that has enabled investors in this new market to generate unmatched returns.
To this end, we are also pleased that the Rivemont Crypto Fund is at the top of the alternative funds that have generated the best returns in Canada over three years, according to data collected by Canadian hedge clockfrom April 2022.
If this price drop openly holds the attention of many market participants, it is not the story of the moment. Rather, it is the operation of the stable currency UST that is creating a real shock wave in the markets. This will be the main theme addressed by this week’s communication.
Instead of being backed by traditional assets (ie cash, government bonds, etc.) or even cryptocurrencies, stablecoin of Terra, UST, seeks to maintain its commitment to the US dollar by using an embossing and firing mechanism in conjunction with LUNA, the native governance and efforts of the Terra Protocol. So far, the network has done this quite well, even exerting upward pressure on the price of BTC in parallel with its treasury by possessing more than 150,000 units.
In this system, investors could always exchange 1 UST for 1 dollar LUNA (and by exchanging these UST tokens and removing them from circulation). So every time UST fell below its $ 1 affiliation, buyers could arbitrage UST at a discount and trade it for $ 1, making a profit. The buying pressure on UST was intended to restore the stack coin’s stick.
That was until last week, when the sales pressure in the markets tested that paper logic hard … only to give it a blow that we do not even know will survive.
On Sunday, the value of a UST fell to $ 0.985. While this may seem like a marginal deviation, the protocol’s inability to bring the perfect stick back triggered a first wave of panic in which LUNA’s price dropped 10%.
The vicious circle (or attack, depending on who you ask) that launches.
A few days later, here is the condition of the injury. The LUNA token is currently trading at $ 1.45, after reaching a maximum of $ 120 on April 5th. A decrease of 99%! Volatility is incredible, but the UST token is currently only worth $ 0.40 when, by its very nature, it is never supposed to move away from the dollar. It dropped as low as $ 0.26 during the day. This is a situation that can not be described in the imperfect, but a crisis that changes from hour to hour. An incredible opportunity for those who believe that the currency will recover, but above all a colossal loss for investors in LUNA, or who have still used UST as a safe haven currency in the crypto ecosystem.
However, this saga does not take place in a vacuum. In fact, in its attempt to restore the bond to the US dollar, the fund is massively liquidating its treasury in BTC (valued at several billion dollars) to buy UST and restore both confidence and bond. This puts downward pressure on the bitcoin price.
Do Kwon, Founder and CEO of Terraform Labs, released a new proposal in hopes of bringing the necessary balance back this morning. “I understand that the last 72 hours have been extremely difficult for all of you. Please know that I am committed to working with each and every one of you to overcome this crisis and we will get through this,” Kwon wrote. To bring the price of a UST back to $ 1, the latter proposes an increase in the supply of LUNA in the market to absorb investors’ attempts to get rid of the broken stablecoin. “The price stabilization mechanism absorbs the supply of UST (more than 10% of the total supply ), but the cost of absorbing so many stack coins at the same time has widened the gap exchange on the chain 40%, ”he wrote. “The LUNA price has dropped dramatically as it absorbs arbs”.
It adds that “From 9-10 May 2022, UST worth about $ 8 billion was withdrawn from the pegging protocol. In the same period, only ~ 1B $ UST was burned.” The proposal has the significance of speeding up the speed with which LUNAs can be set up. Kwon admits that “above all else, the only way forward will be to absorb the offer of stablecoins who want to get out before $ UST can start relocating. There is no way around this problem ”. If UST ever regains its $ 1 commitment, Kwon added that the team “will also adjust its mechanism to provide security.” In short, he got rid of the principle of logarithmic equilibrium. Collateralized stack coins are those that are backed by other financial assets, whether they are traditional assets or cryptocurrencies. Centralized stack coins like Tether’s USDT and Circles USDC are among them. No details on how UST would be guaranteed in a hypothetical future have not been released. We understand that the prioritization is not there at the moment.
One thing is for sure, regardless of the conclusion of this crisis, it will represent a key moment, especially in the authorities’ efforts to regulate such stack coins. “Without a doubt, the loss of the UST stick will be seen as one of the crucial moments in the current market cycle of cryptocurrency. […] Deinking is likely to lead to significant regulatory risk – if not for the crypto area as a whole, then certainly for the stablecoin market, ”said Anto Paroian, CEO of the crypto hedge fund ARK36. Using Terra as an example, Finance Minister Janet Yellen said yesterday that stack coins must be regulated before the end of the year. In a hearing on Tuesday, Ms Yellen said that while digital assets can “promote innovation”, they can also “expose risks to the financial system”.
This situation also makes investors think about the viability of other stack coins in the market. Although “tokenomics” are completely different, there are fears that Terra’s problems will cast doubt on other products with similar purposes. But the guarantee of the above majors is offered by assets, not mechanisms. Therefore, as long as there is no doubt about the very existence of these guarantees that support the value of these currencies, the risk should not exist. For example, from Tuesday afternoon, Tether’s reserves consisted of 84% cash, cash and commercial papers, 5% corporate bonds and precious metals. , 5% secured loans and 6% other assets, such as cryptocurrencies.
However, the relationship between business securities, which are unsecured short-term debt issued by a company, is a source of concern for some. On Tuesday, it accounted for 37% of Tether’s liquidity reserve. So far, no off-rating movements have been observed in these stack coins in this crisis.
One thing is for sure, this is the type of moment that will undoubtedly mark the general ledger of cryptocurrencies and their development.
This article was brought to you by Fonds Rivemont. Rivemont’s crypto fund is the first and only actively managed cryptocurrency fund in Canada. RRSP and TFSA justified. Accredited investors can learn more here.
Disclaimer: This column does not necessarily reflect the opinion of CryptonewsFR and does not constitute investment advice or trading instructions..
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