Inside Crypto’s Capitulation
Plus: Luna’s Eclipse
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees increased over 40% as transaction demand spiked due to market volatility
- Ethereum’s fees remained relatively high, but decreased week over week as last week had the anomaly of the BAYC land sale with record high fees
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- $1.76 billion worth of Bitcoin was deposited into centralized exchanges as panic ensued across markets
- Ethereum saw a surprisingly low net inflows of $1.9M, with large outflows of nearly $400M balancing the previous days of inflows
Inside Crypto’s Capitulation
The crypto market saw the largest crash since May 2021, with most assets dropped 20%+ as stocks also crashed and Terra’s collapse exacerbated the panic throughout the space.
$350B+ Gone — Crypto’s total market cap decreased over $300 billion over the past seven days
- Crypto was in free fall, with multiple assets crashing over 30%
- The crash accelerated following the high 8.3% inflation print in the US, with market participants anticipating strong rate hikes and quantitative tightening
- Terra (LUNA), which a week ago was one of the largest 10 crypto-assets, lost 99.9% of its value, as we’ll further discuss
Stablecoin Hysteria — the UST de-pegging had contagion effects across crypto
- USDT, which is (at least allegedly) fully backed by dollars and treasury notes dropped under $0.94
- The largest stablecoin lost as much as $4 billion in market cap per CoinMarketCap
- Bitfinex and Tether CTO Paolo Ardoino assured that 1-to-1 redemptions for USD were still live and working as intended
Record Volumes — As Tether de-pegged, it reached new highs of over $30 billion in transaction volume in 24 hours
- USDC reached an even higher record of $33 billion the previous day
- Curve, the stablecoin AMM, also recorded new highs of $4 billion in volume two consecutive days, but it didn’t stop its native CRV token from dropping 45%
- MakerDAO’s seems to have come out stronger from UST’s collapse, with the protocol generating large revenues due to liquidations and its MKR token standing out with an increase of 10% over the last seven days
Luna’s Eclipse
The largest algorithmic stablecoin in the history of crypto, UST, has collapsed. UST gained traction for its 20% “savings rate” provided on the Anchor protocol on the Terra layer-1. While it managed to grow faster than any other stablecoin — reaching a market cap of $19 billion within less than two years — UST collapsed even quicker.
The crash began last Saturday as large liquidity providers pulled out of the UST Curve pool.
Precise Timing — The large withdrawals appeared to be timed precisely at the moment when Luna was most vulnerable
- The Luna Foundation Guard (LFG) had just withdrawn $150M from the pool themselves to deposit into the new 4pool, which would be more costly to drain
- Shortly after there are withdrawals of $350M of UST, which are sent to Binance prior to UST’s price cracking below $0.98
- Here the LFG began selling their BTC holdings, as well as LUNA programmatically, in order to support the peg
- But as prices began crashing, panic began and withdrawals from the liquidity pool accelerated
Economic Imbalance — The distribution of the assets in the pool became mostly UST as liquidity providers exited in 3pool
- By Tuesday morning 3pool made up less than 5% of the pool
- This significantly increased slippage for traders on-chain, while selling continued on centralized exchanges
- This led to LUNA’s supply to increase exponentially, effectively culminating in UST’s death spiral
Between UST and LUNA, over $60 billion of market cap imploded. Unfortunately, this makes it the largest project to collapse in the space, in what many are calling crypto’s “Lehman moment”.
While it is difficult to get silver linings out of this, it is a part of a process making the space more resilient. It is also worth remembering why to never invest more than you can afford to lose. Stay safe out there and enjoy the weekend.
Upcoming Webinar
Sign up for our next webinar. Limited amount of free seats available.
