Reasons Why Bitcoin Might Become A Reserve Currency – Cryptovibes.com – Daily Cryptocurrency and FX News
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One crypto platform’s aim to acquire $10 billion worth of bitcoin to tether its ‘stablecoin’ has been firing the market in recent days. This comes as part of a bigger movement to recognize and crown bitcoin as the reserve currency of the new age.
Seoul-based Terraform Labs has been accumulating Bitcoin in recent weeks and has almost 40,000 bitcoin worth $1.7 billion. It has been executing these purchases through a non-profit affiliate, Luna Foundation Guard (LFG), based on publicly available blockchain data.
The buying spree comes after Terraform co-founder Do Kwon’s announcement via Twitter in March that the project plans to acquire $10 billion worth of BTC reserves to underpin TerraUSD. The move appears to break ranks with the other big stablecoins. By description, stablecoins are a ballooning class of cryptos that strive to minimize wild price swings and are mostly backed by US dollar reserves.
Any stablecoin backed by bitcoin reserves, according to Kwon, “will open a new monetary era of the Bitcoin standard”, referring to the gold standard that created the backbone of global finance nearly 100 years ago.
These anticipations and expectations of more to come seem to be supporting the price of bitcoin, with some of the market players identifying them as a major driver of bitcoin’s surge back towards $48,000 at the end of March. Maybe more significantly, is whether any other institutions and projects will follow Terraform’s lead.
The CEO of Sydney-based crypto lender Maple Finance, Sid Powell, stated:
“Buying $10 billion worth can move the price in the short term. But over the longer period, it’s more what it signals – that bitcoin has been introduced as the hottest form of collateral backing for currencies.”
Yet, the other market participants warned that an ever-closer embrace between bitcoin and stablecoin projects like TerraUSD may create a new risk for the crypto space that increased the prospect of a ‘death spiral’ for the investors down the line.
In any way, it will be worth watching. In the near term, as well, there are some challenges. The head of OTC trading at crypto company BCB Group in London, Richard Usher, attributed bitcoin’s gains in March to an improving risk environment. He said:
“There is a danger some people are trying to position long ahead of the buying which could exaggerate a fall if the price starts to retrace.”
One analyst at Norway-based crypto research firm Arcane Research, Vetle Lunde, who tracks the Terra project purchases, estimates that, to reach a first $3 billion in reserves, it might eventually hold 60,000 to 70,000 bitcoin. That amount would exceed Tesla’s (TSLA.O)43,200 bitcoin, the public firm with the second-biggest bitcoin stockpile behind MicroStrategy.
Terraform Labs is yet to respond to a request for comment.
Earth And Moon
The stablecoin market is quickly gaining ground. Stablecoins have now become a common medium of exchange and are mostly used by the traders who seek to move their funds around and then speculate on other cryptos.
For instance, it is quite easy to swap Tether, the largest and most mature stablecoin, for bitcoin and any other crypto, than it might be to swap US dollars for bitcoin. Around one year ago, tether’s market cap was $44.5 billion, while upstart TerraUSD’s was $1.76 billion. They have since gained 85% and 850% respectively to reach $82.3 billion and $16.7 billion, based on data acquired from CoinMarketCap.
TerraUSD is currently the fourth-biggest stablecoin and, just like its peers, is pegged to the US dollar. Nonetheless, while USD Coin and Tether have reserves in traditional assets that they say match the value of their tokens in circulation, TerraUSD maintains its 1:1 dollar peg via an algorithm that moderates supply and demand in a composite process that comprises the use of Luna, another balancing token.
Bitcoin reserves theoretically are meant to add an extra level of reassurance, while keeping the Terra project decentralized. The leader of digital assets research at VanEck in New York, Matthew Sigel, stated:
“Backing it with something as predictable – not from a price perspective but based on rules and governing perspective – as bitcoin brings a lot of confidence to people.”
He stated that he expected the other algorithmic stablecoins to follow Terra’s lead and then back up all their coins with bitcoin reserves, and even other crypto tokens, in case the current experiment succeeds.
‘The Death Spiral’
Not all algorithmic stablecoins have been stable in the past. Some of them have lost their peg and collapsed in value. One analyst at 21Shares in Switzerland, Carlos Gonzalez Campo, while comparing the scenario to a bank run, stated:
“There is still much work to be done and regulatory uncertainties to overcome regarding algorithmic stablecoins and their resistance to a collapse in contractions, which might cause a so-called ‘death spiral’. This phenomenon refers to a theoretical vicious circle where UST (TerraUSD) contraction leads to LUNA being minted and declining in price, which leads to fear and more UST redemptions.”
That is what the bitcoin reserve is meant to avoid. Nevertheless, it might result in a wider contagion. Arcane’s Lunde commented:
“It’s far better to have some reserve outside of luna because otherwise you’re very exposed to its performance and that can make everything break as we’ve seen with other algorithmic stablecoins.”
“But I’m a bit concerned about the long-term structural effects this may have on luna and on bitcoin. If things really start to break up, and they have 70,000 bitcoin in reserves they want to use to settle the market and maintain the peg, it might have implications for the entire market.”
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