Is the Terra crash crypto’s ‘Lehman’ moment?
In literal and quantifiable terms, probably not. But, as a pop-cultural reference to another landmark big, bad contagious collapse, the words ‘Lehman Brothers’ are likely to be thrown about quite a bit in the media over the coming days.
Does it really matter that Lehman was a scud missile to the core of the fundamental financial system, with a more tangible impact on the ‘real world’ economy?
Or that losses generated from this latest financial FUBAR will hit mostly prop-trading crytpo-bros, or that this crypto asset ‘we never heard of’ until yesterday is small enough to fail?
Not really. Don’t let facts get in the way of a good analogy.
Perhaps, the telling and fitting similarity is that both intricate financial nuff-ups can be boiled down to something quite simple.
Both appear as products of finance ‘smartarsery’. Basically, bad ideas executed too well, during boom times.
In a market where everything has been going up enough for long enough, inevitably someone finds a way to make and lose a fortune by trying to be too clever.
Hindsight is 20-20 – and, full disclosure, my full awareness of Luna comes after the crash. So, I missed the bullish zeitgeist that preceded the crash.
But, does it really take a genius to notice the instability built into a virtual currency-peg that simulates a real world currency by buying and selling a bespoke cryptocurrency?
What makes it like Lehman is most people that will lose or have lost their fortunes probably thought this was quite low risk and quite simple. Many will have sleepwalked into it.
I will explain …
Stable coins are a fairly controversial type of crypto asset but, at surface, they sound harmless.
They’re created to mimic the value of a ‘real’ currency in the digital space.
They are supposed to represent a currency (most are US dollars) in cryptocurrency form. The idea is that they allow for dollar-equivalent value to be exchanged between crypto apps and services without user ever needing to switch back into cash along the way.
They are also used by crypto traders who seek to take time out from volatile trading, without the cost or delay of exchanging crypto into cash.
For example, they may close out a trade by exchanging Bitcoin for a stablecoin, instead of converting to dollars. That dollar-equivalent balance would then sit in crypto practically immediately, ready and available for the next trade.
Other stablecoins exist such as Tether and USDC, and they differ in their make-up and functionality, but they too have been scrutinised by financial authorities and central banks – which have their own ideas about what digital dollars might look like.
Contagion
A ‘stable coin’ sounds non-threatening and safe in the way that a mortgage-backed security may sound like it would be underpinned by tangible property.
The problem is that, as it turned out, a UST token didn’t wholly represent a real dollar in the same way that many MBS didn’t wholly represent a real property asset.
Like other stablecoins, UST coins have been integrated across networks of decentralised finance applications, used either for dollar-equivalent transfer or as a dollar-equivalent benchmark in cross crypto-transactions.
Those pseudo-dollars are actually now worth closer to 50 cents apiece. That value mismatch, naturally, scuppers the systems that use them.
It comes at a time when crytpo prices are already falling with trading losses and margin-calls abound.
To make matters worse, Luna - the native crypto used to regulate the intended dollar ‘peg’ - is propped up by a reserve of Bitcoins, which now threaten to flood an already underwater market if the whole platform is liquidated.
Why, why, why?
What’s daft and heart-breaking for many of those that chose to use the supposed dollar-like entity in their otherwise unrelated applications, is that it all looks so unnecessary.
They only needed UST to be a dollar.
Did UST really need to be so complex, so clever?
Would using a like-for-like reserve of ‘real world’ currency or equivalent tangible assets really be too clunky or old fashioned.
How necessary was it to have an algorithm simulate dollars, unlike regular ‘stablecoins’ like Tether and USDC which held dollars.
Harping back to the Lehman analogy, many income investors just wanted the steady and predicable yield that one would expect from otherwise boring interest-paying mortgage investments.
Many didn’t care to look any deeper than that. MBS were opaque but were arguably too boring to scrutise any further, almost nobody looked at the crippling smartarsery beneath.
UST was just a dollar peg, boringly simple – until it wasn’t at all.
Embrace the shame
Perhaps, the crypto evangelists that survive and persist through this crash ought to embrace the Lehman ‘moment’ label, as perhaps they should when crypto has its own Madoff, its own Enron, or its own Nick Leeson.
Perhaps, it’s not a stick to beat crypto ventures with.
Maybe, catastrophe inducing smartarsery is just an inherent feature of finance, bull-markets and bubbles.
Maybe, its something more human. Something that emerges from ego, greed or intellectual one-upmanship. Or, more broadly, the inevitability of human error.
It’s a lot to think and philosophize about.
So, for sure, the ‘L’ word is going to be thrown about a lot. But, really I’m just surprised I have yet to see the Terra Terror headline.