A crypto platform’s promise to raise $ 10 billion in bitcoin to support its “stablecoin” is setting the market on fire. It is part of a broader movement to make bitcoin the reserve currency of a new era.
Seoul-based Terraform Labs has so far amassed nearly 40,000 bitcoins worth $ 1.7 billion in a series of purchases via the non-profit subsidiary Luna Foundation Guard, according to the data.
The frenzy follows Terraform co-founder Do Kwon’s announcement on Twitter last month that the project would buy $ 10 billion worth of bitcoin reserves to support TerraUSD, breaking ranks with other major stablecoins, a category of crypto– booming currencies that aim to minimize wild price swings and are generally backed by US dollar reserves.
A stablecoin backed by bitcoin reserves, according to Kwon, “will usher in a new monetary era of the bitcoin standard,” referring to the gold standard that formed the backbone of global finance nearly a century ago.
These acquisitions, and the anticipation of others to come, are supporting the price of bitcoin, with some market participants identifying them as a significant factor in bitcoin’s rally to $ 48,000 at the end of March. Most important, perhaps, is whether others will follow Terraform’s example.
“The $ 10 billion purchase may move the price in the short term,” said Sid Powell, CEO of Sydney-based cryptocurrency lender Maple Finance. “But over a longer period, this is more what it signals: bitcoin was introduced as the hottest form of currency collateral. “
However, other market participants have warned that an ever closer rapprochement between bitcoin and stablecoins like TerraUSD could introduce new risks to cryptocurrency markets and raise the prospect of a “death spiral” for investors.
In any case, it is worth watching.
Even in the short term, there are pitfalls.
“There is a danger that some people will try to go long before buying, which could exaggerate a drop if the price starts to retrace,” said Richard Usher, the company’s head of over-the-counter trading. London, which attributed bitcoin’s gains last month to an improving risk environment.
Vetle Lunde, an analyst at Norway-based cryptocurrency research firm Arcane Research, which tracks Project Terra’s purchases, estimates that to reach $ 10 billion in reserves, he could eventually hold between 60,000 and 70,000 bitcoins.
That would exceed Tesla’s 43,200 bitcoins (TSLA.O), the public company with the second largest bitcoin stock behind MicroStrategy (MSTR.O).
Stablecoins are rapidly gaining ground. They are a common medium of exchange and are often used by traders looking to move funds and speculate on other cryptocurrencies.
For example, it is much easier to trade tether – the largest and most mature stablecoin – for bitcoin or other cryptocurrencies than to trade US dollars for bitcoin.
A year ago, Tether’s market cap was $ 44.5 billion, while TerraUSD’s was $ 1.76 billion. Since then, they have risen about 85% and 850%, to $ 82.3 billion and $ 16.7 billion, respectively, according to CoinMarketCap.
TerraUSD is now the fourth largest stablecoin and, like its peers, is pegged to the dollar. However, while Tether and USD Coin have traditional asset reserves that they believe match the value of the tokens in circulation, TerraUSD maintains its dollar peg at 1: 1 through an algorithm that moderates the bid and ask price in a complex process. which involves the use of another balance token, Luna.
Bitcoin reserves theoretically add another layer of collateral while maintaining the decentralization of the Earth project.
“By backing it up with something so predictable – not from a pricing standpoint but from a rules and governance standpoint – that bitcoin brings a lot of trust to people,” said Matthew Sigel, head of digital asset research at VanEck in New. York.
He said he expects other algorithmic stablecoins to follow Terra’s lead and back their coins with bitcoin reserves, or even other crypto tokens, if the experiment is successful.
However, not all algorithmic coins have been stable in the past, with some losing their peg and plummeting in value.
“There is still a lot of work to be done and regulatory uncertainties to overcome regarding algorithmic stablecoins and their resistance to a collapse of contractions, which could cause a so-called ‘death spiral’,” said Carlos Gonzalez. Campo, analyst of 21Shares in Switzerland.
“This phenomenon refers to a theoretical vicious circle in which shrinking UST (TerraUSD) causes LUNA to be minted and its price to fall, which in turn generates fear and more UST buybacks,” he said, comparing this. phenomenon to a run on the banks.
This is what bitcoin stash is meant to prevent, but it could also cause wider contagion.
“It is much better to have some spare outside of Luna because otherwise you are very exposed to its performance and it can break everything, as we have seen with other algorithmic stablecoins,” Lunde said. “Arcanum.
“But I’m a little concerned about the long-term structural effects this could have on the moon and bitcoin. If things really start to crash and they have 70,000 bitcoins in reserves that they want to use to regulate the market and keep the peg, that could have implications for the entire market. “
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