April 12 (Reuters) – A cryptocurrency platform has pledged to hoard $10 billion worth of bitcoin to support its “stablecoin” in a market launch. It’s part of a broader movement to crown bitcoin as the reserve currency of a new era.
Seoul-based Terraform Labs has so far built nearly 40,000 bitcoin worth $1.7 billion in a series of purchases via a not-for-profit affiliate, Luna Foundation Guard, according to publicly available blockchain data.
The outburst comes on the heels of Terraform co-founder Do Kwon’s announcement on Twitter last month that the project will buy $10 billion worth of bitcoin reserves to back TerraUSD, breaking ranks with other big stablecoins – a bloated class of cryptocurrency aimed at reducing wild price volatility. It is usually backed by US dollar reserves.
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A stable currency backed by bitcoin reserves, according to Kwon, “will open a new monetary era for the bitcoin standard,” referring to the gold standard that has been the backbone of global finance for nearly a century.
Acquisitions, and more to come in the future, are supporting the bitcoin price, with some market players identifying it as a major driver of bitcoin’s rally towards $48,000 at the end of March. Perhaps most important is whether others will take Terraform’s approach.
“Purchasing $10 billion could move the price in the short term,” said Sid Powell, CEO of crypto lender Maple Finance in Sydney. “But over the longer period, it does what it indicates — bitcoin has been presented as the hottest form of additional currency support.”
However, other market participants warned that the close embrace of Bitcoin and stablecoins like TerraUSD could lead to new risks for the crypto markets raising the possibility of a “death spiral” for future investors.
Either way, it will be worth watching.
In the short term, too, there are drawbacks.
Richard Asher, head of over-the-counter trading at crypto firm BCB Group in London, attributed Bitcoin’s recent month’s gains to an improvement in the risk environment.
Vetle Lunde, an analyst at Norway-based crypto research firm Arcane Research who tracks purchases of Project Terra, estimates that to reach an initial $3 billion in reserves, it could eventually contain 60,000 to 70,000 bitcoins.
This would surpass Tesla (TSLA.O) 43,200 bitcoins, the public company with the second largest stock of bitcoin after MicroStrategy (MSTR.O).
Terraform Labs did not respond to a request for comment.
earth and moon
The stablecoins are rapidly gaining ground. It is a popular medium of exchange and is often used by traders looking to move funds and speculate on other cryptocurrencies.
For example, it is much easier to exchange Tether – the largest and most mature stablecoin – for bitcoin or other cryptocurrencies, than it is to exchange the US dollar for bitcoin.
A year ago, Tether had a market capitalization of $44.5 billion, while TerraUSD had a market capitalization of $1.76 billion. Since then their prices have risen about 85% and 850%, respectively, to $82.3 billion and $16.7 billion, according to CoinMarketCap.
TerraUSD is now the fourth largest stablecoin, and is tied to the dollar as well as its peers. However, while the likes of Tether and USD Coin have reserves in traditional assets that they say match the value of the tokens in circulation, TerraUSD maintains a 1:1 peg to the dollar through an algorithm that adjusts supply and demand in a complex process that involves the use of an arbitrage token Another, Luna.
Bitcoin reserves theoretically add another level of reassurance, while keeping the Terra project decentralized.
Backing it up with something predictable — not from a price perspective but from a rules and governance perspective — where bitcoin brings so much confidence to people,” said Matthew Siegel, head of digital asset research at VanEck in New York.
He said he expects other algorithmic stablecoins to follow Terra’s lead and back their reserve coins with reserves of bitcoin, and even other crypto tokens, if the trial is successful.
However, not all algorithmic coins were stable in the past, as some lost their peg and collapsed in value.
Carlos Gonzalez Campo, an analyst at 21Shares in Switzerland, said: “There is still a lot of work to be done and regulatory uncertainties to overcome regarding algorithmic stablecoins and their resistance to collapse in deflation, which could cause a so-called ‘death spiral’. “. .
“This phenomenon points to a theoretical vicious circle where deflation of terrestrial treasuries (TerraUSD) leads to the minting of LUNA and its lower price, which leads to fear and further recovery of terrestrial treasuries,” he said, referring to the bank rundown.
This is what bitcoin reserves should avoid, but it can also cause the infection to spread.
“It is much better to have some reserves outside of Luna because otherwise you are very vulnerable to its performance and that can crash everything as we have seen with other algorithmic stablecoins,” said Arcane’s Lunde.
“But I am a little concerned about the long-term structural effects that could have on Luna and on bitcoin. If things really start to fall apart, and they have 70,000 bitcoin reserves that they want to use to settle the market and maintain the peg, it could have implications for the entire market.”
(The correct figure for the story is $3 billion in paragraph 11.)
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Additional reporting by Medha Singh and Lisa Pauline Matakal in Bengaluru; Editing by Elon John and Praveen Shar
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