Bitcoin’s price is down more than 50% from its November 2021 peak and has fallen over 11% today, nearing the $30,000 mark, leaving many investors scrambling to figure out what’s going on.
There are two main factors driving pressure on bitcoin prices right now, Caleb Franzen, senior market analyst at Cubic Analytics, said to TechCrunch. “As liquidity gets pulled out of the financial system, risk assets are getting repriced,” Franzen said.
The rising rate environment, paired with weakening economic activity, is creating a risk-off environment, Franzen added. “This is largely why both bitcoin and stocks are falling together. With bonds providing no safe haven, investor sentiment is overwhelmingly negative.”
Again, this adds a recursive element to the market, wherein negative performance leads to negative sentiment, which leads to more negative performance, Franzen noted. “Historically negative performance, historically negative sentiment, and an historical acceleration of yields are the primary driver of the continued selloff.”
A number of market sources are also saying the huge selloff is occurring right now in tandem with the depegging of algorithmic stablecoin TerraUSD (UST) over the past several days.
Terraform Labs (TFL) — the organization behind UST, cryptocurrency LUNA, and Luna Foundation Guard (LFG) — emptied its treasury wallet of all of its bitcoin, about 42,530 bitcoin, or $1.3 billion, today. “That [action could] add meaningful sell pressure on bitcoin and could drag down markets with it,” Corey Miller, growth lead at dYdX, said to TechCrunch.
The UST stablecoin has lost its 1:1 dollar peg ratio for the second time in the past three days and dropped as much as 5.3% to 95 cents on Monday, when it should be always held extremely close to $1. The depegging of UST is forcing LFG to liquidate reserves from both LUNA and bitcoin in order to correct the pegging of UST to $1, Franzen said.
But UST is designed to withstand shocks because it’s an algorithmic stablecoin, Twitter user stablechen, a Terra developer, tweeted. “Compare if $UST goes to $0.90 or $1.1 vs $USDT — the peg bends in one and breaks in the other,” stablechen said. “I blame TFL for creating the wrong expectation with prior posts implying instantaneous peg stability.”
Terraform Labs, which is led by its founder, Do Kwon, announced earlier this year that it planned to obtain $10 billion in bitcoin for reserves to “open a new monetary era of the Bitcoin standard.” The funds were supposed to be held in a treasury to back UST in a decentralized foreign exchange reserve to keep the value of the stablecoin at a fixed rate.
Kwon tweeted earlier today that it was “deploying more capital,” but provided no further details. He also tweeted that “LFG is not trying to exit its bitcoin position,” adding that “the goal is to have this capital in the hands of a professional market maker” so it significantly strengthens the liquidity around the UST peg.
If Terraform Labs is selling its bitcoin en masse into a market that’s already selling aggressively, it wouldn’t offer peg support, Jack Melnick, a token researcher at The TIE, said to TechCrunch.
“They’re just going to crush prices and keep bleeding,” Melnick said. “Then if they support the price it’s going to let everyone else derisk UST and leave them with no money in the treasury to keep the peg.”
LUNA, the token which backs UST, gets “burned” when its stablecoin deviates from its peg, Melnick said, so it’s trying to keep the price at $1 to protect LUNA from getting burned more, but in turn, it’s causing prices to fall further, what Melnick dubbed a “dubious call.”
“UST failing will have a significant impact on the crypto ecosystem,” Simon Furlong, co-founder and COO of Geode Finance, said in an email to TechCrunch. “There is over $18 billion (UST’s market cap) in UST-related liquidity within the wider DeFi space — where UST is being used as collateral and in LP positions — that could be wiped out and cause a ripple effect of negative outcomes throughout DeFi markets.”
As the market is broadly derisking and Anchor rates drop, people care less about the higher yield and more about safety, Melnick noted. (Anchor is a decentralized savings protocol offering low-volatile yields on Terra stablecoin deposits.)
“So they began swapping out of UST to USDC, USDT, which are cash or cash-equivalent backed,” Melnick said.
UST de-pegging will likely weaken the demand for marginal or less popular stablecoins, but it would not spell the end for stablecoins in general, Furlong said. Similar to Melnick’s sentiments, if the UST peg can’t be trusted, “we’ll see a flight to safety, as users will sell UST for more trusted stable coins like DAI, USDC, etc., which stand to benefit from a scenario in which UST loses its peg,” Furlong added.
UST is currently priced at $0.963392, according to CoinMarketCap at the time of publication.
“With the LFG essentially forced to liquidate BTC to stabilize the stablecoin, we have a major institution dumping thousands of BTC into the market,” Franzen said. “This is essentially an algorithmic margin call.”