The Terra crash has doubled down on people’s fears that the sharp downturn in the crypto market, much like the steep rise in U.S. inflation, isn’t transitory but could be longer-lasting.
Led by Bitcoin’s fall from grace, down from its spectacular US$69,000 high in November 2021 down to US$33,000 in January this year, crypto commentators were already noting the first signs of a “crypto winter.” But the final nails in the coffin now include record-busting inflation rates in the U.S., a Federal Reserve getting serious by raising interest rates, and the risk of recession after the tapering off the trillions of dollars injected into the economy.
And it’s not just Bitcoin with its seventh red candle week in a row. Ethereum is also currently down around 58% from its all-time high, and altcoins are down around 80% in value. It’s not a pretty picture, made even worse by the US$40 billion flash crash of LUNA and TerraUSD, which had, “a domino effect on the rest of the cryptocurrency market, tanking the price of Bitcoin and accelerating the loss of $300 billion in value across the crypto economy.” To cap it off, total value locked (TVL) in decentralized finance (DeFi) dropped last week to US$56 billion, according to industry monitor DeFi Pulse, and even NFTs dropped 65% after the Terra fiasco. Overall crypto markets lost a total of US$1 trillion in April.
But if this is the start of another market cycle, dramatized by Terra, there is plenty that marks it as different from previous downturns, not least that the regulatory attention on the crypto industry that was already in motion will be accelerated. “Standing between broad-based mainstream adoption of crypto infrastructure for commerce and financial applications at a global scale is this regulatory clarity,” Circle CEO Jeremy Allaire told Yahoo Money. “We have the impetus to see that happen now.”
Certain U.S. lawmakers called for the regulation of stablecoins last week, balanced by Securites and Exchange Commissioner Hester Pierce, who recognized that the market does need room to allow for trial and error, but she also added that due to the variation in types of stablecoins, it’s also difficult to develop a regulatory framework.
Just as importantly, countries around the world aren’t suddenly going to row back on their engagement with the crypto and blockchain space. Indeed, news that South Korean regulators are investigating Terra may in the longer run help to strengthen plans for crypto-friendly legislation promised by the incoming new president.
Another sign that long-term crypto adoption is moving forward is confirmed by the British government, which says it is planning to regulate crypto, including allowing stablecoins to be a form of payment, as part of its bid to turn the nation into a global crypto hub. It’s therefore excellent timing for Coinbase to launch a global crypto think tank to help mold policy debate about the industry.
Another key player, venture capital firm Andreessen Horowitz (a16z), in its first State of Crypto Report stated that we are now in the middle of the fourth “price innovation” cycle. Which in plain English means that despite the current market downturn, the hard work in the background with development will lead to innovation and growth in the longer term and the start of a new cycle. “Whereas prices are often a lagging indicator of performance in some industries, in crypto they are a leading indicator,” wrote the authors of the a16z report. “Prices are a hook. The numbers drive interest, which drives ideas and activity, which in turn drives innovation.”
I, too, believe that while the market sentiment is negative right now, the demand that drove yield-earning projects such as Anchor, which helped bring down Terra, that same demand isn’t going away as stocks fall in value and savings rates are still relatively low compared to the erosive impact of inflation. Indeed, the demand for stablecoins also remains bullish, with Tether’s USDT riding out the blip in its recent short-lived de-peg from the dollar, and news that MakerDao’s DAI is performing well, with its governance token MKR growing by about 50% since May 12. Despite Terra’s collapse, stablecoins as a whole seem one of the safest bets in terms of growth in 2022.
While the euphoric tone of the Bitcoin 2022 conference in Miami in early April may seem a distant memory right now, the news from Jack Mallers, CEO of Strike, advancing their Lightning Network-based solution is significant. The integration of the Strike wallet with major online players in the U.S. economy aligns with Satoshi’s vision of Bitcoin as a payment system rather than a store of value. It’s also worth noting the Lighting Network-related news from ex-Diem head David Marcus, in the midst of the Terra events on May 12, to launch a new company, Lightspark: “Downturns are good moments to focus on building and creating value with mission-aligned people.” Despite FTX CEO Sam Bankman-Fried’s criticism of Bitcoin for payments, this has scope to offer an exciting integration with fiat money that could be the major development to come out of the current downturn.
In the meantime, while we can only guess at the depth of the crypto downturn, it’s clear that the same basic tenets of investing remain — that retail investors in particular should only get involved with a clear plan in mind. They should only invest what they can afford to lose and be careful with the inherent volatility of crypto assets, and not invest too much as part of their overall portfolio. Part of what made the Terra crash so shocking was that it drew in crypto newcomers who were confident, in part thanks to the high level of prominent venture capitalists investing in the startup and its stablecoin product. But sometimes, as we learned with the 2008 financial market crash, what appears to be the safest assets on the surface can prove to be the riskiest.
However, it’s the long-term investments in the crypto industry that will make the real difference. With recent news that banking pillars like Goldman Sachs are investing in the space, to Meta’s plans to process digital asset payments and investments, a clear difference between the last downturn and this one is the level of institutional and governmental adoption.
The crypto and blockchain space will likely come out of the current downturn stronger, more innovative and more integrated with mainstream financial and retail ecosystems. While it’s still early days, the work in building the metaverse is only just getting started. The road ahead is challenging, but it’s also exciting to see a new decentralized Web 3.0 world emerge with the potential to benefit individuals and organizations alike.