Bitcoin capitulates, but is there hope that the worst is behind us?

GB Market Commentary 12/05/2022

by Marcus Sotiriou

Bitcoin and the crypto markets have capitulated as Bitcoin has reached levels not seen since December 2020. LUNA is now below $0.05 as UST has failed to restore its peg. It is clear that confidence in the protocol has been lost, and now LUNA is mainly being used as exit liquidity for UST holders. In addition, they have built up a significant amount of bad debt.

One way in which Terra can recover, and maybe the only way, is to focus on growing the Layer 1 blockchain and its ecosystem whilst using either USDT or USDC as the stablecoin of choice. If the Layer 1 ecosystem grows successfully then they could potentially be able to pay off the debt eventually. At the moment though, there seems to be little hope for Terra, as well as UST and LUNA holders.

This has had a major impact on the wider market as there are fears of the implications this may have on various crypto businesses or DeFi protocols that were exposed to UST or LUNA, including many funds, VCs and market makers, which may be forced to liquidate other positions.

Some have called this a ‘Lehman Brothers’ moment due to the contagion this may cause, however I am optimistic that UST’s fall would not be that catastrophic – a collapse of USDT would be though, and we have seen the largest stablecoin by market cap wobble over the past 24 hours, reaching as much as a 15% deviation from the $1 peg. Since this deviation, its peg has been restored to $0.984 at the time of writing. Although USDT becoming de-pegged persistently is a risk worth noting, I am confident that the USDT peg will be restored as I think Tether have sufficient backing in their reserves, and its mechanics are safer than the UST stablecoin.

Despite retail sentiment being incredibly bearish, it has been announced that Citi, BNY Mellon and Wells Fargo have invested in crypto trading firm Talos, in a $105 million funding round. This shows that amongst the ongoing fear in the market, established trad-fi institutions are entering the crypto space. It is a signal of where the space is headed in the long-term, regardless of short-term volatility.