The Terra crash has doubled people’s fears that the sharp downturn in the crypto market, similar to the surge in US inflation, is not temporary and could be more lasting.
Led by Bitcoin’s fall from grace, down by its spectacle $69,000 High in November 2021, down to $33,000 in January this year, crypto commentators have already noted first signs of a “crypto winter”. But the final nails in the coffin now include record-breaking US inflation, a Federal Reserve getting serious by raising interest rates, and the risk of a recession after the trillions of dollars pumped into the economy have been scaled back.
And it’s not just Bitcoin with its seventh straight week of red candles. Ethereum is also currently in the red 58% from its all-time high and altcoins are down 80% worth. It’s not a pretty picture, made worse by the $40 billion LUNA and TerraUSD flash crash that “a Domino effect across the rest of the cryptocurrency market, driving the price of Bitcoin higher and accelerating the $300 billion decline in value across the crypto economy.” To top it off, total value (TVL) in decentralized finance (DeFi) fell up last week $56 billionaccording to industry monitor DeFi Pulse, and even NFTs fell 65% after the Terra fiasco. Overall, crypto markets lost overall $1 trillion In April.
But if this is the start of another market cycle being dramatized by Terra, there is much that sets it apart from previous downturns, not the least of which is that regulatory attention already in motion on the crypto industry is being accelerated. “This regulatory clarity stands between the broad mainstream adoption of crypto infrastructure for commerce and finance applications on a global scale,” said Jeremy Allaire, Circle CEO said Yahoo Money. “We have the impetus to see that now.”
Certain U.S. lawmakers called for regulation of stablecoins last week, which was offset by Securites and Exchange Commissioner Hester Pierce, who recognized the market needs room for trial and error, but so did they added that it is also difficult to develop a regulatory framework due to the different types of stablecoins.
Equally important, countries around the world will not suddenly scale back their involvement in the crypto and blockchain space. Indeed, in the long term, news that South Korean regulators are investigating Terra could help bolster plans for crypto-friendly legislation that the new president has promised.
Another sign that long-term crypto adoption is moving forward is confirmed by the UK government, which says it is regulating crypto, including allowing stablecoins as a means of payment, as part of its bid to transform the nation into a global crypto hub. It is therefore an excellent time for Coinbase to launch a global crypto think tank to help shape the policy debate about the industry.
Another major player, venture capital firm Andreessen Horowitz (a16z), in its first State of Crypto Report indicated that we are now in the middle of the fourth “price innovation” cycle. Which in plain language means that despite the current market slump, the hard work behind the scenes with development will lead to innovation and growth in the longer term and the start of a new cycle. “While prices are often a lagging indicator of performance in some industries, in crypto they are a leading indicator,” the authors of the a16z report write. “Prices are a catch. Numbers fuel interest, which fuels ideas and activity, which in turn fuels innovation.”
I, too, believe that while market sentiment is negative right now, the demand that drove high-yield projects like Anchor, which helped bring Terra down, isn’t going away as shares fall in value and savings rates fall still relatively low compared to the erosive effects of inflation. In fact, demand for stablecoins also remains bullish as Tether’s USDT has weathered the blip of its recent short-lived depeg from the dollar, and there is news that MakerDao’s DAI is performing well and its governance token MKR is growing by around 50% since May 12th. Overall, despite Terra’s collapse, stablecoins appear to be 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 like a distant memory right now, the news from Strike CEO Jack Mallers on the advancement of their Lightning Network-based solution is significant. That Strike wallet integration with major online players in the US economy aligns with Satoshi’s vision of Bitcoin as a payment system rather than a store of value. It is also worth mentioning the connection with the lighting network news by ex-Diem boss David Marcus, amid Terra events on May 12, to launch a new company, Lightspark: “Downturns are good moments to focus on building and creating value with mission-minded people.” Despite FTX CEO Sam Bankman-Fried Criticism of Bitcoin for paymentsthis has scope for exciting integration with fiat money, which could be the most important development to emerge from the current downturn.
In the meantime, while we can only guess at the magnitude of the crypto downturn, it’s clear that the same basic principles of investing remain — that retail investors in particular should only enter 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 Terra’s crash so shocking was that it attracted crypto newbies who were confident, thanks in part to the high number of prominent venture capitalists investing in the startup and its stablecoin product. But sometimes, as we learned in the 2008 financial market crash, the safest assets on the surface can turn out to be the riskiest.
However, it is the long-term investments in the crypto industry that will make the real difference. With the recent news of banking pillars like Goldman Sachs investing in the space, to Meta’s plans to handle payments and investments for digital assets, a clear difference between the last downturn and this one is the level of institutional and government acceptance.
The crypto and blockchain space is likely to emerge from the current downturn stronger, more innovative and more integrated with the mainstream financial and retail ecosystems. While it’s still in its infancy, work on building the Metaverse is just beginning. The path ahead is challenging, but it’s also exciting to see a new decentralized Web 3.0 world emerging from which individuals and organizations alike can benefit.
