What’s the crypto vibe?

This is an audio transcript of the FT News Briefing podcast episode: What’s the crypto vibe?

Marc Filippino
Good morning from the Financial Times. Today is Monday, May 30th, and this is your FT News Briefing.

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We’re going to do something a little different on the briefing today. You’ll hear from our friends at Behind the Money, our sister podcast. And we’re going to give you a glimpse into the world of cryptocurrencies and why the vibe, as the kids call it, has shifted on certain decentralised currencies. I’m Marc Filippino. And here’s the news you need to start your day.

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Volatility in crypto markets, it’s nothing new. We’ve talked about crypto volatility a lot on this show, but there’s a certain type of currency that’s supposed to protect against that volatility. They’re called stablecoins and they underpin a lot of the crypto market. The point of a stablecoin is to help crypto investors more easily jump from a traditional currency like dollars or euros into crypto. A stablecoin is always supposed to be a 1-to-1 exchange. Like one stablecoin equals one US dollar. But recently two stablecoins, terra and tether, unpegged from the dollar. On a new episode from our fellow FT podcast Behind the Money, host Michela Tindera and FT reporter Ethan Wu discuss how stablecoins work and what it means that two of the biggest coins dropped below the dollar.

Michela Tindera
Could you just kind of simply explain what a stablecoin is for people?

Ethan Wu
Stablecoins are a very important part of the crypto ecosystem. If you’re not in crypto, these don’t matter to you at all. In a lot of ways, it’s kind of a crypto only thing. But if you are in crypto, this is a key way that you’re moving between dollars and cryptocurrency or between different types of cryptocurrency. And one of the reasons for that is, as everyone knows, bitcoin, ethereum, all these cryptocurrencies are highly volatile. You can gain $1,000, lose $1,000 in an hour. And so when you’re doing trades, if it takes you like an hour to make up your mind on a good trade, you don’t want to be losing money because the currency just moved against you because it’s just so volatile.

Michela Tindera
OK and are there different kinds of stablecoins?

Ethan Wu
So the confusing thing about the word stablecoins is that there’s a lot of different stuff that gets called by the same name but doesn’t work at all like each other. So I’m going to make a distinction. The distinction is between what are called asset-backed stablecoins and algorithmic stablecoins.

Michela Tindera
Ethan says terra is an algorithmic stablecoin.

Ethan Wu
These work with computer magic. These work with a lot of like gizmos and gadgets that try to assure that one algorithmic stablecoin will equal $1. The basic gist is these algorithmic stablecoins are programmed to incentivise people to either, if they’re above a dollar, push them down to a dollar, or if they’re below a dollar, push them up to a dollar.

Michela Tindera
So trust in the system is really important for algorithmic stablecoins.

Ethan Wu
Because they’re not tied to any kind of real world asset. A lot of those algorithmic mechanics depend on people believing in the system. And the second that people’s trust evaporates, you’re in a pretty sticky situation where you can get a death spiral, where a loss of confidence leads to a loss of confidence, which leads to a loss of confidence. And then the whole house of cards starts falling apart.

Michela Tindera
And then there’s tether. That’s an asset-backed stablecoin. That means its reserves are in traditional assets like Treasury bonds or commercial paper.

Ethan Wu
If I lose faith in tether, right? What I do is I call tether up and I say, Hey, I don’t believe in your project anymore. I want my money back. Can I have a hundred tether? Please give me $100. And so tether will take their $100 of let’s say it’s Treasury bonds and they’ll sell that on the open market, get 100 bucks and then give me those hundred bucks. And so I don’t have faith in the project, but I’ve been made whole, so I’m fine and that everyone else will see, Hey, this guy lost confidence, but he got his money back. So we’re fine too. Really? Because worse comes to worst, we’ll just redeem our money.

Michela Tindera
Ethan says another way of putting this is to think of tether like an unregulated bank.

Ethan Wu
That’s not literally true, but I think it’s a very, very close approximation. And I think the very concerning thing is, you know, we’ve discovered in financial history that banks are exposed to bank runs. If everyone tries to redeem their deposits at the same time, the bank runs out of cash. They can’t meet all these redemptions.

Michela Tindera
When terra luna crashed, tether briefly dropped down from its one US dollar peg to 95 cents before bouncing back up to $1 again. Ethan says that a blip like this matters for two reasons. Firstly because of the bank run scenario. But also because the crypto market is dependent on tether to make trades.

Ethan Wu
So if tether can’t consistently stay at about $1, it’s really hard to do any trading in this market. The entire market becomes very brittle if tether doesn’t work the way it’s supposed to.

Michela Tindera
So that’s what’s at stake here. These coins help make the crypto markets tick, and in order for them to work, they need believers. But if you look at what happened in May, it looks almost as if belief in crypto itself is starting to crack. But why May? Why now?

Ethan says the crypto market is all about vibes, and recently the whole economy has felt unpredictable.

Ethan Wu
So when people started getting scared about the state of inflation, the state of economic growth, the state of interest rates rising, which again makes money a little bit scarcer, that leads to a general vibe of, oh, shit, we need to sell, we need to get out, we need to protect ourselves. And especially if bitcoin is at $69,000 and I bought it 30,000, hey, maybe I should take some of my gains here. Maybe I should convert these paper gains, theoretical gains into cash that I can actually, you know, buy stuff with.

Michela Tindera
The value of crypto has been on a downward trend since November 2021, pretty much in line with the stock market. Ethan says people are just feeling nervous about risky assets.

Ethan Wu
Let’s sell speculative stuff and all the speculative stuff. Meme stocks, crypto, high growth technology stocks, those all started falling at about the same time.

Michela Tindera
But Ethan says there really isn’t some complex explanation as to why terra luna specifically dragged tether down with it.

Ethan Wu
There’s no specific reason. Terra luna crashing should cause tether to unlink. But crypto is a lot about vibes. It’s about sentiment. It’s about how people feel when people get scared, they run for the hills. And I think that’s really what you saw is, you know, terra luna crashed and people were like. But Oh, crap, you know, is this a broader problem than stablecoins? And they started selling their tether. But I think the fact that tether bounced back within an hour or two shows that it really was kind of like a temporary worry rather than like a fundamental fear that tether’s reserves are like, like bogus or garbage or whatever.

Michela Tindera
So what’s going on with terra now?

Ethan Wu
Right now the project looks dead. There are attempts and some talk about reviving it in some form. Watch to see how that plays out.

Michela Tindera
So since algorithmic stablecoins are based on investors’ trust in the system, what does that mean for them going forward?

Ethan Wu
I would expect that people will invest less in these projects, in these algorithmic stablecoin projects. They don’t look very stable, really. I think whether terra or luna makes a comeback. This, I think, was really it’s like 15 minutes of fame because, again, I don’t think it is fundamental to the crypto market in the way that tether is. It’s just more of a it’s more of a symbol of the things that have gone wrong as crypto has exploded in value without some of those regulations and best practices evolving alongside with that growth.

Michela Tindera
So with terra, since the project’s collapsed, what does that mean for the people who would have had investments in this? Are they all down to zero?

Ethan Wu
I mean, they’ve lost everything, really. Maybe some were able to get out a little early, but for the most part, if you held terra or its counterpart cryptocurrency, luna, you’re just you’re SOL. You lost a ton of money. I think there’s a lot of talk about a lot of threads contemplating suicide popped up on the luna terra forms. And, you know, I think this is still a very young space and people should be careful about the kind of money that they put into it. Anything that you put in the crypto, you should be ready to lose as I think this this terra luna incident shows very clearly. But the broader message here is that, you know, emerging markets need guardrails because the people that are most likely to get burned are the people that can least afford it and have the least amount of information.

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Marc Filippino
That’s the latest episode of Behind the Money. It’s part one of a two-part episode on crypto. You could follow the show wherever you get your podcasts with new episodes every Wednesday. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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