Will the LUNA rescue plan work?

Do Kwon plans a rescue mission for LUNA by way of forking the current Terra blockchain. There was substantial excitement about this on social media, and LUNA even managed to rise to as much as $0.00022 on Monday evening, 16th May. However, during the early hours of Asian trading it shed around 22% to sit at just over $0.00017. The data shows that some $2.1 billion worth of the tokens were traded over the past 24 hours alone.

Even worse for some LUNA holders, the token is now down more than 99% since its April highs of nearly $120. The dramatic  fall came as excess LUNA were put into circulation last week to prevent the collapse of terraUSD (UST), the Terra ecosystem stablecoin pegged to the US dollar, which we’ve all heard plenty about.

Do Kwon’s proposal on 16th May was to fork Terra to a new chain that would entirely cut out its failed UST product and instead focus on decentralized finance (DeFi) applications building on Terra. Calling the $40 billion implosion “a chance to rise up anew from the ashes,” Kwon said “the ecosystem and its community are worth preserving” as he pitched the second take revival plan as a “living document.”

In his plan, holders of LUNA on the “Classic” chain (the existing chain) would receive an airdrop of the new chain’s token under the plan. The old chain will continue to operate using the newly renamed Luna Classic (LUNC) token.

This is the second time Do Kwon has suggested a plan, although the latest one is less sketchy than last week’s. Compared to the earlier plan, the newer one places a larger percentage of the forked chain’s initial token distribution (25% versus 10%) into a “Community Pool” responsible for funding future development. The new plan also gives 5% of the tokens to “essential developers” – a group not mentioned in the original proposal. Indeed, the vast majority of new LUNA tokens would go to those who lost billions of dollars from last week’s UST collapse. The plan also indicated that smaller holders would get their full allocations faster than whales, and Terraform Labs would get nothing under the deal.

Despite LUNA’s and UST’s crash last week, some market observers remain upbeat on the longer-term outlook of algorithmic stablecoins. Brian Gallagher, co-founder of Partisia Blockchain, said on Telegram, “It is still the earliest days of algorithmic stablecoins. here will be many failures along the way to hold the peg, as they’re mostly in the experimental phase. We have to accept the failures along the path.”

Not everyone agrees with that. Billionaire and Pershing Square Capital founder Bill Ackman commented, “Schemes like Luna threaten the entire crypto ecosystem. The crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad.”

A crash is an opportunity, not a disaster

It’s hard not to panic when you’re surrounded by extreme fear. Yet some manage to see the bigger picture and don’t allow themselves to be swayed by the current fallout in the crypto markets. Arca, a crypto hedge fund is one of those.

Arca manages $500 million in assets, and is one f the firms likely to be feeling the squeeze from the sudden and dramatic collapse of the Terra blockchain’s LUNA-powered stablecoin, UST. It also runs a Digital Assets Fund, in which LUNA is a core holding, according to the note.

Yet it sent a note out on Tuesday this week saying that it had held an ad hoc investment and risk committee meeting to discuss the situation.

This came after UST fell to a low of 63 cents and LUNA was trading at $24.60 on Monday. By Wednesday, UST was still at 63 cents, but LUNA had dramatically fallen below $1.15.

Arca’s response may come as a surprise to some, but not to all. In the note published Tuesday, Arca’s CEO Rayne Steinberg said, “After this analysis, we felt, and continue to feel, that UST will ultimately maintain its peg and a number of attractive opportunities had become available. For example, we were able to purchase UST at a significant discount to par in the DYF (Digital Yield Fund) and then deposit with FTX who were paying 100% APY (annual percentage yield) given the buyer/seller imbalance during peak fear.”

Steinberg added, “We have significant experience in distressed situations from 2008/2009 up to and including SUSHI and LEO (Bitfinex) in recent years. We welcome these opportunities to be buyers when others are fearful.”

And in a similar story, three funds of Cathie Wood’s ARK Investment Management bought a combined total of 546,579 shares of Coinbase Global (COIN). Coinbase shares were down 26.4% to $52.35 in post-market trading on Wednesday.

Although the ‘extreme fear’ meter must be going off the scale right now for crypto investors, the moves by Arca and Ark demonstrate that belief is still strong. They see it as an opportunity to buy at a discount – there are bound to be many others who think the same way. Crypto is not over, no matter what some might say.

Bitcoin rises again

It’s a good week for Bitcoin and altcoins. Finally, there has been a reversal of fortunes and the bears have retreated, at least for the moment. What sparked the about turn of the bearish trend that has dominated the market since the beginning of the year?

The world’s largest cryptocurrency by market capitalization is up 15% over the past week, although it has been outshone a little by Ethereum (up 16%) and Solana (up 25%) over the same period of time. This is not bad news for Bitcoin, as the rise in the altcoin sector shows that an appetite for risk has returned.

According to Coindesk, “the recent rally in bitcoin can be explained by new token accumulation, which is unique to the crypto market.” This refers to the purchase of more than 27,000 BTC worth roughly $1.3 billion by the Luna Foundation Guard (LFG). It promised that it would add BTC as an additional layer of security for UST, which is Terra’s decentralized dollar-pegged stablecoin.

Lucas Otumuro, head of research at IntoTheBlock, a crypto data company, told Coindesk that he believes there “appears to be a synergy between Bitcoin and the Terra ecosystem.” He went on to say, “UST benefits from having additional backing and bitcoin benefits not just from the buying pressure, but also from having a stable medium of exchange backed by BTC.”

But there is more to Bitcoin’s rebound than the purchase by LFG. The recent price bounce appears to be driven by demand in the spot market, which typically occurs around market turning points. There has been a rise in spot BTC volume versus futures volume, and an uptick in bitcoin trading volume across major exchanges. What we need to watch out for is a sudden capitulation to a sell-off. At this moment, an increase in buy volume versus sell volume could determine if the price rally has staying power. Thankfully, according to data from CryptoQuant there is a slight increase in the buy/sell volume ratio over the past week, which indicates bullish sentiment among Bitcoin traders.

We may see some corrections as the week progresses and Bitcoin aims to get past $48,000, but for now we are happy enough to enjoy Bitcoin’s fightback.

Consumers want banks to offer crypto

The crypto market saw a sudden uplift on 15th March, following a few days of sideways trading. According to Ron Shevlin at Forbes, Biden’s recent executive order regarding the responsible development of digital assets helped lift the price of Bitcoin, Ethereum, and other cryptocurrencies.

Ari Redford, Head of Legal and Government Affairs at TRM Labs, offered Shevlin a neat opinion about its effects: “The executive order is really a call for coordination—playing quarterback to ensure that regulators are working together to feed into a clear and consistent framework for crypto regulation rather than engage in disparate work streams.”

This is important for traditional banks, and it should encourage them to engage with cryptocurrencies. They would be foolish not to do that, since many Americans are demanding to be able to purchase crypto directly from their bank, rather than use a crypto exchange.

For example, a very recent survey by Cornerstone Advisors conducted in February 2022 found that “one in five American adults hold some form of cryptocurrency.” The generations that favour crypto are Millennials and GenZ, with Gen X trailing a bit behoind, and the Boomers solidly rejecting the idea of crypto.

Twenty-five percent of Gen Zers already own crypto and 29% plan to buy it within 12 months. Thirty percent of Millennials already own it and 27% will buy it this year. Furthermore, among the Gen Zers and Millennials with crypto, 40% bought or sold it five or more times in 2021.

With regard to banks, the survey revealed that around 50% of Americans that already own crypto would “definitely use a bank to invest in crypto if they could, with another 42% indicating that might do so.”

But banks don’t seem to be getting this message. Shevlin writes: “According to Cornerstone Advisors’ What’s Going On in Banking 2022 study, just 1% of US banks provided cryptocurrency investing or trading services before this year.” What is more, only 1 in 10 American banks plan to offer a crypto service in 2022. It seems that although regulators are trying to make it easier for the banks to become involved, bankers are still tied to their old views.

One senior bank exec told Cornerstone:

“Why are there more cryptocurrencies than US banks and credit unions combined? When is the consolidation and fallout going to occur?”

While another said: “Cryptocurrencies aren’t stable enough to be a legit payment mechanism as the value could fluctuate during the transaction. Instead of pushing crypto ATMs and ways to create your own currencies, it would be great to see more focus on how to solve issues like unaffordable housing and the student loan.”

It seems he’s missing the point, and indeed, the demand. Although nt all of them are so blinkered. One banker actually sounded positive, commenting, “We need to accept that cryptocurrency is here and start planning TODAY on how to approach this and not wait until it’s too late and we’re reacting versus planning.”

We know that banks are risk averse, and have consistently issued warnings about the risks they see with crypto, but it would seem that based on the consumer view, the biggest risk to the banks is not getting involved with cryptocurrencies at all.