The buys are back in town
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
Bitcoin continued its unabated run this week, with close to 4% gains seeing the leading crypto rally to the cusp of $43k. The somewhat unexpected rally comes after talks of de-escalation in Ukraine, and rebounding equity markets, including the NASDAQ and S&P 500. However, another clear catalyst has emerged in the form of Terra founder, Do Kwon.
Ego-driven sentiment
Crypto, since its inception, has had a habit of building cults of personality. From the mythos of Satoshi Nakamoto to project founders lauded by their maximalists, in many ways mass sentiment is dictated by the ideas and actions of deified builders. This has been compounded by the entrance of major institutional figures such as Zhu Su, CEO of Three Arrows Capital, who now commands significant influence in the wild west that is crypto twitter.
We’ve witnessed first hand the potential consequences of such loyal adulation - with DeFi pioneers like Andre Cronje and Daniele Sestagalli recently exiting the space in disgrace, pocketing hundreds of millions of dollars in the process.
Enter Do Kwon, Co-founder of the Terra protocol - a network responsible for the issuance of Terra (UST), an algorithmically backed stablecoin. Put simply, algorithmic stablecoins maintain their peg to the US dollar by balancing supply through smart contract algorithms. This approach differs drastically from traditional stablecoins such as Tether (USDT), which maintain their peg via 1:1 backing against physical dollars.
As a result, algorithmic stablecoins do not need treasuries of fiat to back their offerings. Many key players have been critical of such architecture as these stablecoins are uncollateralised (not backed by any other asset), and, once lost, regaining the USD peg becomes a challenge for algorithmic protocols.
A fresh approach
In order to bolster UST’s backing, Kwon recently announced that the foundation would be purchasing $3B in BTC, chunked in $125M buys, with an eventual goal of amassing $10B in BTC for its treasury, with the aim of making UST a “hybrid” stablecoin collateralised with BTC. Terra’s first purchase, via the Luna Foundation Guard (LFG), came on Monday, prompting the rally that has seen the digital asset surge towards the upper bounds of the current trading range that has dictated price action since January.
Continued buys of such significant size have the inevitable impact of bolstering market-wide sentiment. However, given the declining volume of recent days, the longevity of current momentum remains questionable, especially considering the increasingly arduous macro economic landscape. Further, Kwon’s public announcement of Terra’s renewed tokenomics strategy is puzzling, considering that the news in itself could ignite a rally - meaning that LFG would be forced to purchase at a premium as investors attempt to frontrun the news.
Dominance
Bullish sentiment in BTC has naturally spilled over into crypto as a whole, with many altcoins enjoying double-digit daily gains throughout the week. Perhaps most impressive is Ethereum’s relative strength, with the smart contract leviathan gaining another 1.5% this week against BTC to claim $3k at the time of writing. Importantly, ETH’s surge has seen a breakout from the downtrend that has persisted since December, bolstered by viral optimism surrounding the network’s upcoming merge to Proof of Stake consensus.
ETH:BTC, TradingView
Forward focus
In many ways, the current state of crypto speculation remains more uncertain than ever before, as BTC continues to consolidate following a year of successive all time highs and sharp retraces, all without the fabled blow-off top that has marked the peak of previous cycles. The now-entrenched institutional presence in the market has forced investors to reevaluate the theses that have historically played out fairly neatly in the form of clearly delineated bull markets followed by multi-year bear markets.
The continued evolution of BTC’s use cases - from a payments system, to a Store of Value, to a form of collateral supporting stablecoin issuance and lending in DeFi protocols - evidences the speed at which the industry is moving and the continually broadened scope of disruption via blockchain. Regardless of the nuances of Kwon’s strategy, the injection of heightened buy pressure spells an optimistic outlook for crypto-wide price action, at least in the short term. However, should such large purchases fail to ignite sustained upward momentum from investors en masse, this could signify a broader lack of market confidence.
As traders, the urge to trade constantly can become consuming to a fault - in times of great uncertainty, such as in our present situation, one must remember that oftentimes the best course of action is to simply observe, until a point where trades can be entered into with confidence.