First Mover Asia: Terra’s Planetary Collapse Is Taking Down Crypto Lending, Altcoins Plummet

·9-min read

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Good morning. Here’s what’s happening:

Prices: Bitcoin struggles; altcoins fare worse.

Insights: Terra's implosion threatens crypto lending protocols.

Technician's take: BTC is oversold and could see a short-term relief bounce.

Catch the latest episodes of CoinDesk TV for insightful interviews with crypto industry leaders and analysis. And sign up for First Mover, our daily newsletter putting the latest moves in crypto markets in context.

Prices

Bitcoin (BTC): $29,127 +1%

Ether (ETH): $1,968 -5.1%

Biggest Gainers

Asset

Ticker

Returns

DACS Sector

Bitcoin

BTC

+1.0%

Currency

Bitcoin Cash

BCH

+0.4%

Currency

Biggest Losers

Asset

Ticker

Returns

DACS Sector

Solana

SOL

−10.2%

Smart Contract Platform

Cosmos

ATOM

−9.1%

Smart Contract Platform

EOS

EOS

−9.0%

Smart Contract Platform

Another forgettable day for cryptos

Bitcoin had a forgettable Thursday. As for altcoins, the less said, the better.

After hitting a new 16-month low earlier in the day, the largest cryptocurrency by market capitalization was recently trading at $29,100, up slightly over the past 24 hours. That was little comfort for investors who have watched it plunge with other digital assets the past few days, swept up with investor fears following the collapse of the terraUSD (UST) stablecoin against its 1:1 dollar peg. Bitcoin was already reeling from wider concerns about high inflation and geopolitical turmoil.

Still, other cryptocurrencies fared far worse, a sign of the risk-off environment that has investors veering away quickly from any asset with a whiff of risk. Ether was trading at about $1,960, off about 5% after dipping under $1,800 earlier in the day, the first time since last July it had sunk below that level. In a sea of major crypto red, SOL, CRO, ADA and MATIC were each down roughly 10% at one point. SAND and ATOM were off 14.5% and 9%, respectively.

Meanwhile, Terra blockchain's LUNA token plunged below 2 cents on Thursday, prompting validators to briefly halted the network to implement a patch that would prevent new actors from staking on it. Just a month ago, LUNA had reached a high of $120. UST was recently trading at about 33 cents, down about 54%.

Equity markets did better, rallying late to finish slightly down from where they started the day. Still, rising prices loomed large as a report Thursday found that mortgage rates had climbed to 5.3%, their highest rate since 2009.

In an interview on Thursday with the public radio business show "Marketplace," Federal Reserve Chairman Jerome Powell said that he couldn't guarantee a soft economic landing as the Fed increases interest rates to tame inflation. "Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control," Powell said.

"The higher-than-expected inflation figures in the U.S. have prompted investors to move towards selling risky assets, impacting cryptocurrencies in the process as well," Daniel Takieddine, CEO of Middle East and North Africa region of brokerage BDSwiss, wrote in an email. "The move towards a rapid rise in interest rates could keep cryptocurrencies on a sliding trend for a longer period of time as investors move to safer assets."

He added: "This bearish trend is further exacerbated by the recent crash of the TerraUSD, which lost its peg to the USD by a large margin. Its fall in value has eroded investors' confidence in the crypto markets and in the stablecoin concept in particular."

Markets

S&P 500: 3,930 -0.1%

DJIA: 31,730 -0.3%

Nasdaq: 11,370 -.06%

Gold: $1,820 -1.8%

Insights

Terra's implosion threatens crypto lending protocols

Crypto lending, the backbone of decentralized finance (DeFi), was built in the rubble of the COVID-19-induced crash of March 2020. The prevailing logic behind crypto lending is to provide a smoother off ramp than rapid-fire selling, which depresses prices.

But as the collapse of Terra’s LUNA and UST tokens has sent shock waves throughout the industry, accelerating the decline of the price of bitcoin, knocking tether off its peg and reiterating concerns from institutions and regulators about the viability of the asset class, crypto lending appears to be its next victim.

Data now suggests that there’s a cavalcade of people looking for an exit.

The total locked-in value for DeFi is at $150 billion, down from just under $240 billion at the start of the year and from $230 billion a month ago, according to Glassnode data.

Data would suggest that many traders are moving their crypto out of DeFi protocols and into stablecoins like USDC with plans to redeem them (stablecoins like USDC and USDT can be redeemed for U.S. dollars upon request).

Total value locked (Glassnode)
Total value locked (Glassnode)

The supply of USDC, used by institutions and U.S.-based traders because of its regulatory compliance, is now just below $48.5 billion, down from $53 billion at the beginning of March. A similar trend is being seen with Glassnode’s data on exchange net positions. Since mid-April, it has flipped to red, now accelerating with Glassnode reporting daily outflows in the $2 billion range.

At the same time, lending protocols like Compound are reporting large declines in stablecoin supply. Compound, for instance, reports an 11% decline in USDC supply. All the while, gas trackers show that in the last week gas fees from USDC are up 175%, while gas usage at lending protocol Aave is up 705% over the past week.

Lending protocol prices aren’t taking well to this dash for the exit. Across the board, the tokens of major lending protocols are down with aave falling 53% over the past week. Celsius has dropped 55.6% over the past week and compound has fallen 49% during that time.

Top lending/borrowing coins
Top lending/borrowing coins

Despite less USDC in circulation, there doesn’t seem to be a particular increase in demand for it. Given the coming bear market, trading tempo will likely decrease and planned investment into crypto infrastructure might slow. The case and point for this is the yield offered by Alameda Research’s syndicated loans powered by the Maple Finance protocol.

Loan amounts (Maple)
Loan amounts (Maple)

Alameda’s most recent USDC-denominated loan, which launched last week just as the Luna crisis emerged, is now offering only a 6.5% yield. When the project began last November, 8.5% was the available yield. Although there is less USDC available, Alameda is anticipating a slowdown and doesn’t have the same need for it.

The good news from this crisis is that many parts of the infrastructure surrounding crypto are continuing to hold. USDC and Binance’s BUSD, are still at $, and redemptions – even from tether which was briefly knocked off its peg – are being processed on request.

Technician's take

Bitcoin Holding Support Above $27K, Resistance at $35K-$40K

Bitcoin's daily chart shows support/resistance with RSI on the bottom. (Damanick Dantes/CoinDesk, TradingView)
Bitcoin's daily chart shows support/resistance with RSI on the bottom. (Damanick Dantes/CoinDesk, TradingView)

Bitcoin appears to be oversold on the charts, which typically precedes a short-term upswing in price.

The cryptocurrency declined toward $25,400 Thursday afternoon before quickly recovering back above the $27,000 support level.

The relative strength index (RSI) on the daily chart is the most oversold since January, which preceded a 30% relief rally. This time, however, negative long-term momentum could cap upside moves around the $35,000 resistance level.

Further, BTC registered a countertrend reversal signal on the daily chart, according to DeMARK indicators. That means selling pressure could wane over the next few days as buyers return from the sidelines. Another daily close above $30,000 would confirm the countertrend signal, although there is a low chance of significant upside from here.

Important events

HKT/SGT(UTC): Australia Housing Industry Association new home sales (MoM/April)

10 a.m. HKT/SGT (2 a.m. UTC): Speech by Michele Bullock, assistant governor at the Reserve Bank of Australia

3 p.m. HKT/SGT (7 a.m. UTC): Speech by Luis De Guindos, vice-president of the European Central Bank

CoinDesk TV

In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

UST Meltdown Continues as Crypto Markets, Communities Suffer. Here’s Where Things Stand

Another 24 hours of painful losses in the crypto markets. "First Mover" discussed new details in the TerraUSD drama and markets analysis from Kevin Zhou of Galois Capital, Michael Gronager of Chainalysis and Martin Leinweber of MV Index Solutions.

Headlines

Terra’s LUNA Has Dropped 99.7% in Under a Week. That’s Good for UST: LUNA tokens lost 96% in the past 24 hours alone, prompting more to be minted in a mechanism that helped lift the UST price.

Tether Loses $1 Peg, Bitcoin Drops to 2020 Levels of Near $24K: Weak sentiment around stablecoins may have contributed to USDT’s de-pegging Thursday morning.

Global Crypto Regulatory Body Is Coming Soon, Says Top Official: A joint body to coordinate efforts at regulating crypto at the global level could become a reality in the next year, according to Ashley Alder, chairman of the International Organization of Securities Commissions.

Terra Proposes Token Burn and Increase in Pool Size to Stop UST Dilution: Terra believes that decreasing the amount of UST in circulation, while increasing the amount of available LUNA, is the easiest way to return the UST to a peg.

Chainalysis Raises $170M at $8.6B Valuation: The crypto sleuthing firm says it tools monitor $1 trillion worth of transactions every month.

Longer reads

Do Kwon Is the Elizabeth Holmes of Crypto: If you promise investors something impossible, is it a crime?

Today's crypto explainer: What You Need to Know Before Buying Bitcoin at an ATM

Other voices: Panic in the crypto market has Janet Yellen's attention (CNN)

Said and heard

"Web 3 has stunned the world by forging a parallel system of finance of unprecedented flexibility and creativity in less than a decade. Cryptographic and economic primitives, or building blocks, such as public key cryptography, smart contracts, proof-of-work and proof-of-stake have led to a sophisticated and open ecosystem for expressing financial transactions. Yet, the economic value finance trades on is generated by humans and their relationships. Because Web 3 lacks primitives to represent such social identity, it has become fundamentally dependent on the very centralized Web 2 structures it aims to transcend, replicating their limitations." (Glen Weyl, co-author of “Radical Markets" for CoinDesk) ... "The economy can only go so fast without overheating. A big problem now is that nobody is sure just how fast that is." (The Wall Street Journal) ... "As Russia’s grinding war pulverizes eastern Ukraine and eats away at the global economy, it is also creating unintended consequences for President Vladimir V. Putin, whose aggression is giving rise to a stronger, Western-aligned security architecture in Europe, the very thing the Russian leader had hoped to weaken." (The New York Times)

UPDATE (May 13, 2022, 0:15 UTC): Adds comment by Jerome Powell in the prices summary.

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