April 12 (Reuters): A cryptocurrency platform’s promise to amass $10 billion worth of bitcoin to back its own “stable coin” is sending the market skyrocketing. it’s part of a broader movement to crown 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 through nonprofit affiliate luna foundation guard, according to publicly available blockchain data. .
Reading: Bitcoin reserve currency
The spree follows terraform co-founder do kwon’s announcement on twitter last month that the project would purchase $10bn worth of bitcoin reserves to support terrausd, breaking ranks with other major stablecoins, a growing class of cryptocurrencies that aim to minimize wild price swings and are typically backed by the u.s. reserves in dollars.
A stablecoin backed by bitcoin reserves, according to kwon, “will usher in a new monetary era of the bitcoin standard,” referencing the gold standard that formed the backbone of global finance roughly a century ago.
The acquisitions, and the anticipation of more to come, support bitcoin’s price, with some market players identifying them as a big driver of bitcoin’s rally back to $48,000 in late March. more significant, perhaps, is whether others will follow terraform’s lead.
“Buying a $10 billion security can move the price in the short term,” said Sid Powell, CEO of Maple Finance, a Sydney-based cryptocurrency lender. “But over a longer period, it’s more of an indication: that bitcoin has been introduced as the most popular form of collateral for currencies.”
Other market participants warned that an increasingly close embrace between bitcoin and stablecoins like terrausd could introduce a new risk to crypto markets that raised the possibility of a “death spiral” for investors going forward.
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Either way, it’ll be worth a look.
in the short term, there are also pitfalls.
“There is a danger that some people are trying to position themselves well in advance of buying, which could exaggerate a drop if the price starts to pull back,” said Richard Usher, director of OTC trading at crypto firm BCB Group in London. , who attributed bitcoin’s gains last month to an improving risk environment.
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vetle lunde, an analyst at arcane research, a Norwegian crypto research firm that is tracking purchases from the terra project, estimates that, to reach an initial reserve of $3 billion, it could eventually contain between 60,000 and 70,000 bitcoins.
That would exceed 43,200 tesla bitcoins (tsla.o), the public company with the second largest bitcoin holdings behind microstrategy (mstr.o).
terraform labs did not respond to a request for comment.
earth and moon
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 another crypto, than it is to trade us. dollars per bitcoin.
A year ago, tether’s market capitalization was $44.5 billion, while terrausd’s was $1.76 billion. since then, they have risen 85% and 850%, respectively, to stand at $82.3 billion and $16.7 billion, 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 reserves in traditional assets that they say equal the value of the tokens in circulation, terrausd maintains its 1:1 parity in dollars through an algorithm that moderates supply and demand in a complex process involving the use of another balance token, moon.
bitcoin reserves theoretically add another level of peace of mind, while keeping the terra project decentralized.
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“Backing it with something as predictable, not from a price perspective, but from a rules and governance perspective, as bitcoin gives people a lot of confidence,” said matthew sigel, head of digital asset research at vaneck In New York.
said he hopes other algorithmic stablecoins will follow terra’s lead and back their coins with reserves of bitcoin, and even other cryptocurrencies, if the experiment is successful.
the spiral of death
However, not all algorithmic stablecoins have been stable in the past, and some have lost their parity and have collapsed 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 in contractions, which could cause the so-called ‘death spiral,'” said carlos gonzalez campo , analyst for 21 shares in switzerland.
“This phenomenon refers to a theoretical vicious circle in which ust (terrausd) contraction leads to moon minting and price declines, leading to fear and more ust bailouts,” he said, comparing this with a bank run.
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this is what the bitcoin reserve is meant to prevent, but it could also cause broader contagion.
“It’s much better to have some reserve out of the moon because otherwise you’re very exposed to its performance and that can cause everything to crash like we’ve seen with other algorithmic stablecoins,” said lunde of arcane.
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“but i’m a little worried about the long-term structural effects this might have on luna and bitcoin. and keeping the peg, it could have implications for the whole market.”
(The correct figure for the story is $3 billion in paragraph 11).
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