TerraUSD plunge spooks crypto market

For some perspective on the stablecoin that is not very stable right now we chat to Marius Reitz – GM, Luno Africa.

FIFI PETERS: There has been massive pressure on cryptocurrencies in the past month with Bitcoin, the biggest, plunging from over $40 000 at the start of April to now below $30 000.

To help us understand and make sense of these massive moves that we are seeing in the crypto market, I’m joined by Marius Reitz, the general manager for Africa at Luno, a platform where you can invest in cryptocurrencies.

Marius, thanks for joining the show. We do know that there’s been a selloff in the broader equity market as well. It has not been left unscathed, but it looks like the crypto space is really feeling the rough ride of all the turmoil that is happening right now. Just help us understand what is souring sentiment towards cryptocurrencies.

MARIUS REITZ: Hi Fifi. As you said, I think there are multiple reasons for the drop in prices. First, as you mentioned, the crypto correction is not happening in isolation. The crypto market is experiencing the same pressure as other parts of the global economy, and financial markets are trending down across the board. So I think that’s the first point.

Secondly, I think what caused the market to correct even further was a more technical reason. That is that one of the largest US dollar-backed stablecoins (TerraUSD), which is a cryptocurrency that is backed by a real stable asset – in this case the US dollar – lost its peg to the dollar and traded as low as $0.40 to the dollar at its day.

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That’s obviously concerning because the stablecoin failed to hold up to its name, really, and the problem that it’s trying to solve; and that is the price volatility in the crypto markets.

So I think that gets a lot of questions around the level of trust that people place in crypto protocols and platforms, and I think it will push the crypto markets down further. The impact of this really is, as you said, the Bitcoin price that’s starting at a 16-month low is just below the $30 000 mark, and that’s down from $69 000 last year in November. And then smaller cryptocurrencies, such as Ethereum and Cardano, are also experiencing drops. So it’s a broad market selloff.

Over the past 24 hours we did see some of the coins stabilising slightly. Bitcoin is slightly up, but it’s still definitely trending downwards overall.

FIFI PETERS: That’s a reference that you made of the stablecoin that is not very stable at this point – the TerraUSD. It was supposed to trade in tandem with the dollar, essentially at that $1 peg, and now has crashed to $0.40. So talk to us and help us understand what happened with this particular story, what caused the crash and when you are expecting to see the situation improve.

MARIUS REITZ: Fifi, it’s more a technical front. As you mentioned, the stablecoin is meant to maintain that peg of one TerraUSD equal to one US dollar. You get different types of stablecoins, certain more centralised stablecoins, such as USDC or USDCoin [which are] also [among] the top two/top three stable coins. According to market capitalisation, they hold the actual US dollar in a bank account.

So at all times, when a new USDC coin is issued, there’s $1 in the bank account backing that USDC and the fiat currency is audited by independent auditors.

In the event of TerraUSD, it is a programmatic stablecoin. So it’s not backed by $1 to $1, but it involves trading algorithms in the background that maintain that peg. There were problems over the past week with that algorithm, which I think to some extent shows that the technology is still very, very new and that some of these problems will slip in over the course of the next tough cycle. I’m not sure what’s being done to correct that, but definitely that caused some damage to the level of trust, especially on the stablecoin side and especially for non-centralised stablecoins.

FIFI PETERS: Do you think that that damage to trust can be reversed, or do you think it’s permanent? I think this is one of the areas in which people who scratch their heads over whether to invest in crypto or not speak quite closely to the trust and the safety of one’s investments. These moves have been really brutal, and they’ve been really brutal over just a couple of days. So can that trust be restored, in your view?

MARIUS REITZ: Yeah, I think so, for sure. I think we’ve been through many incidents in the past decade or so, and you get different levels or different types of crypto.

So for example, TerraUSD really isn’t an investment. It’s meant to be stable crypto. That trade is mostly used to shield volatility during times when they’re not trading cryptocurrencies, so some people use it as a type of money-market fund and so forth, but a lot of people don’t invest in stablecoins.

I think what we probably see here is a bigger focus on regulation and a bigger focus on crypto platforms such as the Lunos of the world to ensure that that capability to safeguard customer finance – customer information as well.

So people considering investing in the crypto markets for the first time should take the time to do the research, and a lot of that involves looking up the company that’s offering these services, and bringing it to South Africa, ensuring that it’s a local business, ensuring that they have security processes that they advertise on the website. You can identify the owners of that business and you can also read up and see whether they’ve been involved in discussions on a regulatory level.

Lastly also read up reviews online on sites like Hello Peter. So I think there’s a lot of research that potential prospective investors can do from their side.

But I also think that most of the established crypto exchanges such as the Lunos and the Coinbases of the world are all credible and they follow the process of self-regulation, which I think is the best thing to do in the absence of regulation, and it’s the responsible thing to do. So not all platforms operate on the same level; some really comply and act as if they are regulated.

FIFI PETERS: Bitcoin is presently at a 16-month low, as you have said. When do you see that situation improving, when do you see the coin going back up to those November highs of over $69 000, and how long do you reckon it’ll take?

MARIUS REITZ: Well, that’s a good question, and I wish I knew. But what I can say is that we go through these market cycles. What I can say is the drop this time around is actually smaller compared to 2018, when we saw a massive correction of more than 80%. Currently we are just over 50% or so, 60% over the past 12 months or so.

I think we are seeing higher lows as time goes on. If you zoom out and look back over the past 10/12 years, really, we’ll see that there’s still a steep upward trend in the Bitcoin price. Short term we will go through these volatile periods, and therefore it’s very risky.

People who take a long-view of the market think that crypto’s got a role to play in future. They like it, perhaps, as an inflation hedge. So what they do is, instead of trying to buy the dip [when] they think the price has bottomed out, they buy it regularly at intervals which they call dollar cost/rand cost averaging. So over a period of time they actually mitigate or manage that risk of constant price volatility.

I’m not sure when we reach the bottom, but what I do know is that we end up with high lows over time and the market will push back in the next couple of weeks – hopefully.

FIFI PETERS: Well, I think that crypto enthusiasts are hoping that you are right, Marius. We’ll leave it there for now. Marius Reitz is the general manager for Africa at Luno.

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