Wow. Its been hard to hold crypto the last little while. I haven’t been paying much attention recently due to family issues but I can say that every time I do take a look it hurts my heart a little. We dipped below $40 XCH today, not for the first time this week, and there is still more blood to bleed.
So what is going on? There are a few things at play here. First, the overall economy is drying up. Federal banks are raising interest rates around the world and have slowed the flood of free money flowing into the economy. The stock market is also falling, so its not like you can hedge your crypto bets there or vise versa. But crypto is taking the biggest beating of them all right now.
One of the reasons for this is the amount of artificial leverage in the crypto market. We have seen some of the effects of that already, with Terra and their Luna blockchain and UST “stablecoin” basically evaporate overnight. This wasn’t a zero sum game where that money went somewhere, it was a bubble collapse and that money never existed at all.
Now UST was what is known as an “algorithmic stablecoin” which means that they use smart contracts to hold X amount of crypto in reserve to back their UST token. The problem here is obvious, right, that when the entire crypto market falls the backing disappears and people start trying to sell UST for the highest price they can get while trying to exit the entire thing collapses. Which is exactly what happened. And will happen with all algorithmic stablecoins eventually, either deliberately via an attack or by accident due to a market crash.
Even Tether, which is ostensibly an asset-backed stablecoin, suffered a fairly significant dip in value over the last week as things were crashing. As that token is actively managed by the Tether corporation they were able to adjust supply to keep their price relatively stable but its still an ugly situation. And really shows how they are obviously backing Tether with at least some crypto, not all unrelated assets like it should be.
These stablecoins are acting as a fractional reserve for crypto, accelerating the velocity of money that moves around and ensuring there is liquidity available even for trades that would ostensibly have none. They have inflated the bubble over the last few years that we are finally seeing start to pop. There is certainly some value in the idea of a dollar-denominated token to do trades with, but it should be representative of the wider economy not a math trick that only works under certain conditions.
I still have hope that Chia Network will deliver on their promises and XCH will have significant value compared to the wider crypto market. I still think that Proof of Space and Time is a balanced tradeoff between resource waste and security, especially when compared to Proof of Stake. The technology they are developing really still feels like another full iteration of cryptocurrency. There is no doubt in my mind that the energy arms race of Proof of Work has a very limited shelf life on the global stage, and a secure replacement is a necessity.
But at this point in the cycle I would not recommend to anybody that they invest money in crypto. It will likely be some time before we see prices start to rebound, and between now and then a lot of coins will wither and die. Let’s hope Chia isn’t one of them.