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HEALTH, WEALTH, AND HAPPINESS

May 12, 2022

"All the breaks you need in life wait within your imagination, Imagination is the workshop of your mind, capable of turning mind energy into accomplishment and wealth."

- Napoleon Hill

Bitcoin is Acting Like Just Another Tech Stock(New York Times): Finally, they're getting it.

After years of patiently explaining our approach to crypto investing (treat cryptos like companies, analyze them like you would a tech stock), the mainstream financial world is finally catching up.

Think of crypto projects like companies. Invest in them just like you would a tech startup, as part of a balanced portfolio.

It's finally sinking in.

While this article is dismissive of bitcoin believers, it does admit that bitcoin's "long-term growth remains impressive." Which leads to our other key principle: invest for the long term. (5+ years.)

Investor takeaway: Thinking of bitcoin as "just another tech stock" may be the most helpful advice the New York Times has given to investors yet. Finally, they're catching on.

Which stablecoins will stay stable?

That's the question around TerraUSD, the algorithmic stablecoin that is now CNN newsworthy. Here's the current value of TerraUSD, which was designed to hold its value to the dollar:

Remember: red = bad.

LUNA, the token designed to counterbalance the stablecoin, is now worth about a penny, as investors have sold off shares:

The next thing to watch closely is collateral-backed stablecoins, which (unlike TerraUSD) really do have "money in the vault."

As investors rush to pull out this money, these will also see price shocks, such as Tether (USDT), which slid to 97 cents:

However, note the scale: there's a big difference between dipping to 97 cents (Tether) vs. 30 cents (TerraUSD). Note also how quickly they bounce back: as long as Tether can get money out of the vaults quickly enough to handle the "bank run," it should be fine.

Even USDC, the most closely audited of all the stablecoins, is seeing mild turbulence:

But again, note the scale: USDC has not yet budged a single penny. This is good news for fully-backed stablecoins.

The bigger question is what will happen to the other great algorithmic stablecoin, Dai?

Remember that Dai is also backed by collateral -- there's "money in the bank" -- though much of that money is in crypto. We've long held this is riskier than fully-backed stablecoins like Tether and USDC, because a crypto crash could send Dai into a "death spiral."

So far, however, Dai has held its peg to the dollar remarkably well, staying within a penny on either side. Dai has also weathered its fair share of financial crises in the past, but this is the great test: can an algorithmic stablecoin survive the worst?

Investor takeaway: Fully-backed stablecoins like USDT and UDSC will probably be fine. Collateral-backed stablecoins like Dai are uncertain. And TerraUSD is toast.

Yesterday, I even bought $100 worth of the stuff just to be part of the solution. I thought if we all bought a bit, we could get the peg back and save a $20 billion asset. I was wrong.

The ramifications for the space and what we've learned post-mortem are significant and vital lessons as we go forward.

Frazzled and untethered market

So shaken was the market this morning that some investors started to doubt stablecoins in general, and tether, in particular, was under extreme pressure as USDT temporarily lost its peg to the U.S. dollar as well. 

While this was happening, I managed to set up an impromptu Twitter Space, which was quickly joined by Tether CTO Paolo Ardoino, who displayed nothing but confidence even as the volatility ensued.

He explained to our listeners that despite any sort of fear or lack of confidence, Tether stood ready and was already redeeming USDT for clients of $100,000 or more for exactly $1.

He also clarified that Tether is holding a significant amount of U.S. Treasury bonds that can easily be sold in order to maintain a 1-to-1 offering for their clients.

Perhaps part of Terra's problem was that they were backing the asset with bitcoin, which saw massive losses against the dollar between the time that the Luna Foundation Guard bought it and the time it needed to sell. 

Another part was probably the unchecked arrogance of Terra's founder, which likely eroded confidence in the system. After all, if we boil it down to the essence, all money is just confidence.

The belief that a dollar will still be worth a dollar tomorrow, or whenever we choose to spend it, is what gives money its value in the first place. Sure it's circular logic, but it works.

I had a chance to rant on how confidence plays into the value of money today live with Dan from The Defiant and Bancor's Mark Richardson, check that out here.

The highest levels

Unfortunately, we're no longer playing in our own secluded sandbox. Previously, even the largest of DeFi debacles were easily laughed off and tossed out. Luna's demise, however, did not fly under anyone's radar. 

It may not come as much of a surprise to most of you, but I disagree wholeheartedly with the Treasury secretary on this one. In the case of Luna, the contagion component was extremely limited and it certainly wouldn't fall into the category of too big to fail.

Yes, several of crypto's biggest billionaires have seen their personal wealth decimated over the last few days, but let's not forget that these people have pretty much come from zero to where they are now.

The fact is that we have much more intelligent retail investors these days, in some cases probably more intelligent than the lawmakers who write the legislation.

During the height of the pandemic, when practically everyone was confined to their homes with little but internet access and a bit of extra cash from the government, day trading quickly increased in popularity.

Case in point, the fact that people refused to buy UST for 50 cents today because they understand that it might not come back to a dollar indicates that they're well aware of the risk.

Wishing everyone a peaceful weekend.

Mati Greenspan

Analysis, Advisory, Money Management

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