Interview With a Weiss Crypto Analyst

by Jurica Dujmovic
By Jurica Dujmovic

"May you live in interesting times."

Sounds like a lovely expression, right? Well, some say it's actually a curse, meant to ensure the person experiences the tumult and instability that often accompanies "interesting" moments in history.

But blessing or curse, times sure have been interesting in crypto lately.

Last week, the shadow of the Federal Reserve still weighed heavily over the market, instilling fear, uncertainty and doubt (FUD) in weak hands, but only marginally moving the markets ... at first.

"It's been priced in," most — including us — said as the market even pumped in the hours following the end of the Federal Open Market Committee meeting.

This week, however, revealed that there was still weakness to be found. Over the weekend, prices across the board slipped. And they continued to fall into the week. In just the past 24 hours, the global crypto market lost $205 billion. An untrained eye doesn't have to look past Bitcoin (BTC, Tech/Adoption Grade "A-") to realize just how bad the past week has been.

In total, the cryptocurrency market lost 22% of its value.

BTC and fellow market leader Ethereum (ETH, Tech/Adoption Grade "A") have fallen below key levels as of the time of writing, and the tide of selling has washed away the value of other cryptocurrencies, meme coins included. The price of Shiba Inu (SHIB) — a popular meme coin that saw a meteoric rise last year when it was listed on centralized exchanges — fell 13% in the last week, while its trading volume took a 11.5% hit in the last 24 hours.

But the big story this week was the crash of Terra (LUNA, Tech/Adoption Grade "D") and its stablecoin, TerraUSD (UST). There are many theories out there about why this happened, and to address the topic properly we need to take out the big guns.

In this case, this means going straight to one of our experts, Marija Matić, and asking for her brief analysis. Rather than rewrite what she said, I'll let you be a fly on the wall for our conversation ...

Jurica: What caused the crash?

Marija: The cause of the crash is yet to be understood properly and clearly, but it seems as if it was initiated by a so-called liquidity attack on UST pool of Curve's platform.

Curve is the most important stablecoin-trading platform and the largest DeFi (decentralized finance) app in the world.

Jurica: Do we know who the perpetrator is?

Marija: The attack seems to have been performed by a large entity with deep pockets, considering that most of the initial sales were done in $300,000 increments.

Jurica: OK, so we have the what and an idea of the who. Do we know how the attack was successful?

Marija: Essentially, it boils down to low liquidity.

Right before the attack, which seems to have been planned, LUNA moved UST from the important Curve pool to a new one, leaving the Curve pool with little liquidity and vulnerable to dumping. Dumping large quantities of UST would cause the price to fluctuate too wildly.

It would appear this attacker did just that and caused a moderate depeg of UST to just below $1.

Then the attacker started dumping UST on Binance exchange — a major centralized exchange outside of North America — which caused a more serious depeg. As the price of UST fell, it fueled fear, uncertainty and doubt (FUD) and a bank run, which spiraled out of control.

Adding fuel to the fire was the announcement that the Luna Foundation Guard decided to move over 40,000 BTC from its wallet to defend the peg. That could have had severe consequences because, at the time, it was unclear if the plan was to sell the BTC — and in so doing, flood the BTC market and bleed out BTC's price — or just lend it out, as initially intended.

The handling of the Reserve Treasury that contained the Luna Foundation Guard's BTC hasn't yet been automated, so tracking the BTC was difficult at the time, leading to more FUD. It wasn't until the next day that it was confirmed the BTC would be lent, rather than sold, calming the situation down … but only temporarily.

Terra's founder, Do Kwon, didn't provide sufficient solution to the entire issue, and he lacked confidence in his public announcements, leaving investors uneasy.

And a final level of FUD was heaped on when Treasury Secretary Janet Yellen reacted to the depeg by saying that the run on UST illustrates the potential threat to financial stability posed by unregulated cryptocurrency markets during a Senate Banking Committee hearing on Tuesday. She has used this as an opportunity to garner support for stablecoin regulation.

That sentiment is shared by policymakers abroad, as well. On Wednesday, this was followed by the news of EU Commission favoring a ban on large-scale stablecoins.

Jurica: It seems like this may have a ripple effect on other stablecoins, as well.

Marija: Yes. There's FUD all around about stablecoins now, even though other stablecoins are unrelated to LUNA and have possibly better defense mechanisms against depegging. Still, general weakness of the market has caused governance coins of stablecoin makers to bleed.

Things truly look bad for stablecoins, it seems, and it may take the market a while to renew the lost confidence.

And speaking of lost confidence, let's turn to Coinbase Global's (COIN) latest drama.

Coinbase CEO Brian Armstrong was chastised by the community today — and rightly so, in my opinion — for not disclosing this little detail: "In the event of a bankruptcy ... customers could be treated as our general unsecured creditors."

Now, read that again. Even though Coinbase is supposed to be FDIC-insured, it's still reserving the right to not repay the value of your holdings in the event of a bankruptcy.

For crypto veterans, this unfortunately isn't surprising. I've said plenty of times here that ownership of your own assets is vital in true crypto. And if you've been reading your Weiss Crypto Daily issues for a while, you'll be familiar with the mantra: "Not your keys, not your crypto."

The response to this disclosure has been mixed. The loudest voices are calling for all crypto investors and traders to move their assets out of Coinbase. But others are dismissing those fears, claiming that Coinbase is "too big to fail."

For that latter group, I'd say they could use a reminder that in the first quarter of 2022 alone, Coinbase lost $430 million. Or maybe a reminder that more recently, Coinbase plunged 25% overnight, causing its biggest drop on record.

And looking outside of crypto, we should know by now that nothing is too big to fail.

All of this has reflected onto the market sentiment, which became even more dire, causing the Fear and Greed Index needle to slip from 21 — already a level indicating extreme fear — last week to 12 today. The result of markets being drenched in panic is also the rise in bearish sentiment, which today reached the highest point in the last 90 days.

So, what's the takeaway here? Are the skies falling down? Is it the end of the world?

Or could this be just another week living in these "interesting times" in crypto?

As Alex Benfield wrote yesterday, crypto isn't going to $0.

Still, crypto investing isn't for the weak of heart. Volatility has always been a core component of this market, and will continue to be, especially for smaller projects. It's important to know and respect your own personal level of risk tolerance when navigating a market like this.

On our end, we have our best analysts working through the data and trying to find the best opportunities in this market.

As always, we'll share what we know as soon as we know it on our twitter channel (@WeissCrypto), as well as in these daily reports, so stay tuned.

Until next week,

Jurica Dujmovic

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