Destabilising Stablecoins, On-Chain Outlook, Edition #38 (11/05/2022)
Crash of TerraUSD. Wildcard Fundies. Tragedy of Do Kwon. It's all happening for cryptocurrency markets and Q has the goods in tonight's coverage of developments On-Chain 👇
The overnight collapse of TerraUSD. A tale of market dynamics—or a foul gambit?
The past 24 hours have seen a truly spectacular turn of events for cryptocurrency markets.
Let’s get straight into the guts of things.
We begin with a discussion of Do Kwon’s terra-ble situation, with special interest paid to the de-pegging of TerraUSD, $UST.
For those unfamiliar with Do Kwon, the South Korean blockchain entrepreneur is the cofounder of Luna and the Terra ecosystem.
The ecosystem has an algorithm stablecoin called UST, which is pegged 1:1 to the US dollar. In the last 24 hours, we saw this drop as low as US$ 0.66 only to recover to US$ 0.93 briefly before revisiting US$ 0.7’s earlier this morning.
Also, the term ‘peg’ refers to the fixing of an asset or currency’s exchange rate to:
One particular foreign currency
A basket of foreign currencies
Or, some convertible measure of value (e.g. Gold)
So when people discuss the $UST peg to the US dollar, they are referring to the fixing of the asset’s exchange rate to a particular currency i.e. the US dollar. Similarly, the de-pegging of the exchange rate of $UST could infer a floating rate that is determined by market forces i.e. supply and demand.
Stay tuned for our next publication! We cover the latest stories in NFTs and publish insights from Technical and On-Chain analysis for crypto explorers 👇
Now, it makes sense to take a moment to understand what has happened.
But, note that the following is a combination of complex speculation that is explained simply.
This is how the team at Qluster Data Labs interprets the recent chain of events, based on the current data that is available for review.
Before we get stuck into tonight’s feature analysis of UST’s spectacular fall, make sure you’ve watched the newest episode of Charting with Griff and get the refreshed technical analysis update from Edition #212 of the Technical Outlook newsletter.
So, what caused the de-pegging of TerraUSD, UST?
With the recent news breaking headlines and capturing the lion’s share of investor attention, a logical first step is to scrutinise the timeline of key events leading up to the tragic collapse of TerraUSD.
There is a line of speculation that currently exists on the internet. And it seems the crypto-space has this to say:
This was a planned attack by a major cryptocurrency investment management firm.
But, how could an investment manager have pulled off such an egregious heist?
Manager borrows 100K Bitcoin
They then swap 25% of the 100K Bitcoins for UST, meanwhile, 75% remained as Bitcoin holdings
It is likely that multiple short positions were opened
Commence dumping the 75% BTC holdings into market
It is likely that they also started dumping UST around the same time after the initial attempt to depeg the token
Kwon is forced to sell Bitcoin at lower prices depleting the Luna Foundation Guard (LFG) reserve in an attempt to save the UST peg
The entire cryptocurrency market cascades and dumps due to Bitcoin price action being ‘king’
So, how did the asset manager nail the timing of execution?
From an initial assessment, it seems that our hero may have had a hand to play in his tragic downfall.
Do Kwon made the mistake of letting everyone know that he may start selling BTC at the 98 cents threshold in order to restore the UST peg.
This threshold was met on Monday when the UST price went below 0.98.
It is likely that the fund manager took advantage of this information aiming to push the peg below 98 cents by dumping both assets. The initial break of the peg also made UST investors feel less certain, triggering UST holders to sell and capitalise on their UST holdings, adding further supply-side pressure.
There are traces of Do Kwon moving $BTC from out of his wallet. However, while there is no actual proof that anyone has sold the BTC, it is very likely he did.
Above: Screenshot of Kwon’s initial BTC transfer out from his wallet
On-chain for Bitcoin
When analysing the on-chain metrics for Bitcoin, it is important to recognise the sudden and rapid increase in the supply of BTC on exchanges.
This may appear to be a divergence from coverage published in earlier editions of the On-Chain Outlook, but a simple explanation for this surge in supply can be found in the events leading up to the collapse of $UST.
As such, the uptick in the supply of Bitcoin on exchanges is likely due to a combination of both the investment manager and Do Kwon’s Bitcoin holdings being released to the market.
Click here to catch up on our past coverage of Bitcoin and Ethereum’s on-chain metrics in Crypto with a side of OC, Edition #36. Plus, get the latest insights of exciting moves in the Solana NFT space 👉
Well done! You’ve made it to the end of the article. Now, help us share our latest market intelligence with a friend (and then scroll down for tonight’s conclusion…)
Many of our astute readers may be wondering what the future holds for Luna and the Terra ecosystem.
Is trust lost?
There’s no need to sugarcoat things. Yes.
Is redemption still conceivable—can Terra be saved?
What does the future hold for UST? While no one can be sure right now, let’s hear what you think in the comments below 👇
See you again for the next update.
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