Fighting Fire with Fire - Terra "Stablecoin" Crashes and burns + El Salvador buys more bitcoin after ratings agency downgrades its debt

[Lightwreather]

Summary

Nayib Bukele, the bitcoin-boosting president of El Salvador, sees bitcoin's low price as a buying opportunity. He announced on Monday that El Salvador had purchased another 500 bitcoin. With one bitcoin worth around $31,000, this represented a $15.5 million betBloomberg calculates that El Salvador has accumulated a total of 2,301 bitcoins since it started buying them last September. Most were bought at prices above $45,000, so this nation of 6 million people has lost tens of millions of dollars speculating on bitcoin.

 Last week, ratings agency Moody's downgraded El Salvador's debt, warning that the Central American nation may be forced to default. El Pais reports that Salvadoran bonds are trading at around 40 percent of their face value, a sign that traders see this as a serious risk.

 

The value of a cryptocurrency called Terra has imploded over the last 48 hours, falling from $1 on Monday to a low of 30 cents early Wednesday morning. That's a big problem because Terra is a "stablecoin": Its whole purpose is to remain pegged to the US dollar in a one-to-one ratio.

 

Quotes

El Salvador

Quote

The government of El Salvador is heavily in debt and has an $800 million debt payment coming due in January. Last week, ratings agency Moody's downgraded El Salvador's debt, warning that the Central American nation may be forced to default. El Pais reports that Salvadoran bonds are trading at around 40 percent of their face value, a sign that traders see this as a serious risk.

El Salvador's bitcoin experiment has worsened the country's already precarious financial situation. That's not only because Bukele has tied up tens of millions of dollars in the volatile cryptocurrency. It has also damaged Bukele's relationship with the International Monetary Fund, which is currently considering whether to offer El Salvador a $1.3 billion line of credit.

In January, the IMF recommended that El Salvador liquidate its bitcoin holdings in order to shore up its fragile balance sheet. The Bukele administration reacted angrily, with Treasury Minister Alejandro Zelaya declaring that "no international organization is going to make us do anything, anything at all." Bitcoin's price has fallen by about 17 percent since the IMF made its recommendation.

Bukele is also pushing forward with plans to construct a new "Bitcoin City" in the shadow of El Salvador's Conchagua volcano. The idea would be to create a global hub for cryptocurrency users and entrepreneurs—all powered by geothermal energy from the volcano. On Monday, Bukele tweeted photos of himself reviewing a scale model of the planned metropolis.

To jumpstart the project, Bukele is planning to sell $1 billion worth of "bitcoin bonds." In an unusual financial arrangement, half the proceeds would be invested in bitcoin, while the other half would be spent on infrastructure projects for the new city. If bitcoins gain value over the 10-year life of the bond, bond investors would get half the gains.

Critics pointed out that this arrangement makes little sense, since people who want to invest in bitcoin can invest directly in bitcoin and get 100 percent of any gains. But Bukele is counting on the novelty of the bonds—which are slated to be tokenized and sold on a blockchain—to attract investors.

Terra:

Quote

Terra was paired with another cryptocurrency called Luna, whose price would rise and fall with market demand. If Terra's price fell below $1, traders could exchange them for $1 worth of Luna, maintaining a fixed exchange rate between Terra and the US dollar. Conversely, if demand for Terra rose, people could convert Luna into Terra using a smart contract.

The hope was that the growing use of Terra would push up the value of Luna, providing a powerful backstop for the stablecoin. For a while, this all seemed to be working. In April, there were $18 billion worth of Terra in circulation, making Terra the world's third-largest stablecoin.

But as cryptocurrency values fell in the last week, this scheme started to unravel. Luna's "market capitalization"—the value of all Luna in circulation—fell below that of Terra. This made Terra's peg unstable, further weakening confidence in the whole scheme.

 

My thoughts

Hmm. I suppose, Go big or go home, right? Who cares if you've got an entire nation riding on the outcome? That's the sort of vibes I'm getting from this. This isn't really all that newsworthy, he did do this twice before. (Sorry if this feels lazy, I lost a lot of energy on that EU article). There's also the fall of the 3rd largest "Stablecoin", which might have decimated before trying to hold other cryptos value to buy them back a bit later. It overall seems rather Choatic in the crypto market and I'm not too sure if the news of El salvador buying more BTC will improve the situation apart from a mild blip. 

 

Sources

ArsTechnica (Both)

El Salvador:

Twitter - One, Two

Bloomberg

Moodys

Elpais

 

[Levent]

What a visionary government, buying the dip.

 

 

/s

[Middcore]

22 minutes ago, J-from-Nucleon said:

There's also the fall of the 3rd largest "Stablecoin"

 

 

Yeah I saw some pretty brutal (as in suicidal) posts on reddit yesterday about that.

[Rauten]

I honestly don't give 2 shits if this "bitcoin vissionaire" bankrupts himself.

But all the people in his country that he's dragging through the mud with him... ugh.. I'm once again reminded of the monorail scammer in Simpsons.

[Kisai]

29 minutes ago, Rauten said:

I honestly don't give 2 shits if this "bitcoin vissionaire" bankrupts himself.

But all the people in his country that he's dragging through the mud with him... ugh.. I'm once again reminded of the monorail scammer in Simpsons.

That episode of the Simpsons has "derailed" many rail projects and proposals in the United States, because for some reason people associate rapid transit as a scam. Thanks The Simpsons. Meanwhile the ones that do somehow get rolled out, are very much a scam because cities would rather get more slow transit that nobody wants to use for the buck than rapid transit that is seen as "poor people don't deserve it."

 

Anyway, F bitcoin and anyone who still owns any and complaining now, they dug their own grave and the warning bells have been blaring for the last two years. If they ignored the warning signs they have nobody to blame but themselves. 

 

 

[Lightwreather]

WEll, turns out Terra crashing and burning was a far bigger deal than I initally thought.

Lot of people panic selling it and it has dragged literally dragged every crypto down with the sole exceptions of USDC and DAI.

[Helpful Tech Witch]

10 minutes ago, J-from-Nucleon said:

WEll, turns out Terra crashing and burning was a far bigger deal than I initally thought.

Lot of people panic selling it and it has dragged literally dragged every crypto down with the sole exceptions of USDC and DAI.

Usdt is also stable

it dropped two cents earlier this morning but has returned to 1.00$

[strajk-]

13 hours ago, Helpful Tech Wiard said:

Usdt is also stable

it dropped two cents earlier this morning but has returned to 1.00$

UST is however nowhere near comparable to USDT.

While USDT is pegged to real life assets (real estate, cash, stocks...etc), UST was literally just an algorithm that consolidated with LUNA by constantly minting or burning new tokens in order for it to stay pegged at $1

There have been several posts over the past months warning investors that if someone with enough capital swooped in, they could cause the whole algorithm to go haywire in order to attempt keep it pegged at $1, in this case it was by minting literal Billions of new tokens per minute, causing people that bought in at a higher price to essentially now hold the equivalent of Chuck'e'Cheese tokens, it flash crashed all the way down to be worth $0.000003 per LUNA, it used to be at over $100 per LUNA.

 

The creator is also quite the character, insulting anyone that dared question the algorithm and the value of its tokenomics, his twitter account is quite the goldmine, specially loved calling haters "poor so I won't argue with you", karma is best served cold although he probably still holds Millions in other assets thanks to this venture but still has his life at risk since he is 100% doxed.

 

Here is a post of someone that did his due diligence months ago, good read and funny to read the comment:

[Arika]

¯\_(ツ)_/¯

 

my only regret is that i cant ¯\_(ツ)_/¯ any bigger