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Mr. Market Audits The Stable Coins

UST – Terra Bulls, Just Terrible

If you’re having peg problems I feel bad for you son.

I got 99 problems cause UST ain’t $1

If you want to know what’s happening in crypto, go listen to the Talking Heads on Twitter (note their best album was… ”Stop Making Sense.”)

If you want to know what’s next… listen to Jay-Z and Mr. Market.

Unless you have been under a rock the last 5 days, you know that crypto has had an almighty meltdown that centered around the Terra / Luna coins. In short, Terra is a stable coin designed to always trade at exactly $1, and Luna was the floating currency that would either mint or burn UST to keep it in balance. 

Until it “broke the buck.”

UST was designed to always trade at $1. When it doesn’t… there’s a problem.

A similar-looking thing happened in 2008, when the Reserve Primary Fund, a money market vehicle, also lost its peg to the dollar right after the Lehman Brothers bankruptcy. It was the first sign of systemic contagion, which ultimately led to the Fed stepping in to save the monetary system.

The similarities end there, though.

For one… there is no Fed. Crypto runs entirely outside any organized economic system by its very design. Nobody is going to step in and save it.

Paradoxically… that’s a good thing!

Prices are being reset constantly to reflect risk. Right now, investors are not just assessing whether the system is stable, they are testing it in real-time. 

That’s right, real-time. The key difference between crypto and every other market is settlement times.

In crypto, settlement is instantaneous. If you buy Bitcoin on 100x leverage and blow yourself up, you blow yourself up. But nobody else is on the hook. That’s very different than equities, where settlement can take up to two days. (Remember the great big Robinhood scandal where they stopped letting people trade GME? That was due to settlement times.)

That means that even as owners of coins – asset managers, funds, individuals, whomever – get blown up, the whole system keeps operating.

Or as Jay-Z says… ”What you eat don’t make me shit.”

There is clearly price risk. In Crypto, price is about the only piece of information available. But there is not systemic risk. In fact, this is an incredibly healthy clearing out of speculative excess and will reset prices to levels that more accurately reflect risk.

Where are those levels? Nobody knows, not even Mr. Market. But my fears around crypto are not systemic. 

They are rather more prosaic. In a system designed around price, momentum is the only thing that matters. And right now, momentum is awful…

Tether – Getting Pegged

Is Tether a fraud? Maybe! But if it is a fraud, they have had a whole lot of time to un-fraud it. 

Way back in 2017, the Panama Papers leak showed that Bitfinex was behind Tether, and so in 2019 the New York Attorney General launched an investigation to see if their claims to be fully dollar-backed were true.

Obviously, they weren’t. Tether never proved what its assets were, but it changed its disclosure around asset backing. The whole market continued to believe in the fiction that Tether was backed.

But a funny thing happened. Even though Tether’s transaction fees are low, its volume is so high that they had the chance to make back billions of dollars. As a result, they more than likely were able to back some if not all of the outstanding claims.

Today the market is having a go at Tether. The counter consensus view is that it holds.

If USDT hangs on to a buck, crypto likely has an almighty rally after the beatdown it has taken.

Just remember that Mr. Market can swing from fear to greed in a nanosecond.

And that it always pays to listen to Mr. Market.

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