The Terra Turmoil: A Deep Dive into Crypto’s Roller Coaster
The chaos surrounding the US$60 billion Terra ecosystem collapse is way from over. As the dust continues to swirl, we’re piecing together the mayhem with insights from industry experts like Angus Crennan, a founding partner at Sydney’s Balmoral Digital.
The Python and the Pig: A Crypto Tale
Hey Angus, the crypto community remains to be feeling the shockwaves from the Terra debacle. Can you share your tackle what really went down?
That’s a terrific query. Frankly, we’re still at the hours of darkness about many elements. There are several theories, but the complete story may not emerge for a while. We do know the initial sell-off stemmed from the Curve pool. [For those not in the know, Curve is a liquidity pool on Ethereum for smooth stablecoin trading.] The real issue with UST’s unpegging was liquidity, much like a bank run. Watching LUNA and UST unravel was like watching a python struggle to devour a pig. Crucially, it wasn’t about solvency.
A python swallowing a pig? Please, do explain.
In a well-functioning market, you’ve two forms of orders: market orders, which execute immediately, and limit orders, which set prices that are not currently met. When an enormous sell order hits—far exceeding available bids—it drives prices down by matching even the bottom offers. Observing this, others panic and sell too, while buyers hesitate, fearing they’re “catching a falling knife.” The “pig in the python” imagery describes an enormous sell-off attempting to squeeze through scant liquidity, causing the chaotic price swings we saw with LUNA and UST.
Lessons from Crypto’s “Lehman Brothers” Moment
Some are calling this crypto’s Lehman Brothers moment. Do you agree?
Not really. These crisis points push the ecosystem to grow and refine. We’ve seen crises before, and markets are all the time vulnerable to sudden mood swings from fear to greed. During the GFC, even the Commonwealth of Australia needed to back high-grade NSW Government Bonds!
Is the Storm Over? The Future of Algo Stablecoins
The market has taken a success from the LUNA chaos, but is that this just part of a bigger downtrend? Have we seen the worst of it?
It’s hard to say. If the market had been higher informed and assured enough to soak up the selling, LUNA and UST might need weathered it. Confidence is now seriously shaken, with talks of either burning excess LUNA or rebooting Terra as Luna 2.0.
What’s your view on algorithmic stablecoins post-crisis? Can they get better from this reputational blow?
There’s definitely a future for algorithmic stablecoins. They meet a necessity for stable, blockchain-compatible assets. While they lack traditional asset anchoring—a double-edged sword—their unique features are in demand. However, the backing assets require exceptional design, balancing treasury and risk management to tackle various threats.
Opportunities Amidst the Chaos
Do you see any investment opportunities now, either attributable to the Terra collapse or unrelated market conditions?
Definitely! The imbalance in peer-to-peer blockchain markets is ripe with opportunity.
Forecast: Headwinds and Tailwinds
What potential challenges and supports do you foresee for the crypto market, each locally and globally?
Regulatory risks are a significant headwind for crypto investments. But regulation can boost confidence on this recent asset class, which some still dismiss as “magical internet money.” Those burned by LUNA and UST underscore the necessity for diligent risk management on this volatile field. Yet, strong tailwinds are blowing, just like the 44 emerging-market countries exploring Bitcoin with El Salvador.
Additionally, smart contracts are being rapidly adopted for post-trade solutions in global commodity markets and ESG tracking. Visa is backing Solana hackathons, which speaks volumes about blockchain’s potential. If Visa is on board, others will certainly follow suit.
Despite the turbulence, how is Balmoral Digital Assets Fund faring?
Remarkably well. We’re on course for a 20% return for our clients this yr, and we expect positive results this month despite market stress. Our robust risk management strategies have positioned us well, and we’re confident in our approach moving forward.
The Balmoral Digital Assets Fund is a specialized investment vehicle aimed toward being “delta neutral,” striving for independence from other asset classes to reinforce portfolio diversification. Learn more about it here.
This Q&A has been edited for clarity. The opinions expressed are those of the interviewee and don’t reflect the views of Stockhead. Stockhead doesn’t endorse or assume responsibility for any financial product advice in this text. The creator holds Bitcoin, Ethereum, and other digital assets on the time of writing.
Image Credit: stockhead.com.au
