MAY 15, 2022 | Issue 15
A HISTORIC WEEK FOR CRYPTO
Let's begin with the TerraUSD Luna stablecoin saga. I cover it in more detail below, but the highlight is that TerraUSD, like all stablecoins, was designed to trade for $1 USD per coin.
Terra had a unique mechanism to ensure it stayed at $1, but it failed this week. As I am writing this early Saturday morning, TerraUSD is trading for under $0.01. Its collapse during the week destroyed $40 billion in value.
As Terra tanked, panic ensued in crypto world. Other stablecoin investors got nervous and then millions of crypto investors began questioning whether crypto is the future of all money.
The "adults in the room" cryptocurrencies, Bitcoin and Ethereum, fell 20% and 27% respectively.
Where does that leave the crypto industry? Is it going to disappear based on what happened this past week? Nope. Let's put crypto in perspective. "Market cap" is one way to size up a company or an asset by looking at the total dollar market value. The US dollar has a market cap of $40.7 trillion. Gold is $11.49 trillion and cryptocurrency is $1.3 trillion. Crypto is not as big as gold or USD, but $1.3 trillion is significant. Cryptocurrencies, blockchains, and stablecoins backed by real assets, are here to stay. The price volatility will remain as will its correlation with tech stocks. Nevertheless, many crypto investors who were spooked by this week's price drop and all the headlines may decide to move their money into real estate. Be prepared for them. I see some crypto savvy sellers and developers proclaim in their marketing material that they will accept cryptocurrency. (Sellers may still require that the crypto is converted into USD before the closing.) If you have a buyer who wants to pay with crypto or a seller who is willing to accept a crypto buyer, educate yourself on the potential pitfalls and the process. Read past issues of Crypto News for Realtors and my other crypto blog posts. As always, if you have any questions, reach out to me. Also, I am scheduled to give several crypto talks to Compass offices over the next two weeks. If your office is interested in having me speak, please reach out to me. I hope you had a wonderful weekend. Have a productive week and stay crypto curious (in spite of the headlines)! Rich Hopen email@example.com | 908.917.7926 PS. You can find all CNR newsletters here.
CRYPTO & REAL ESTATE
▸ East European Developer Using NFTs to Lure Investors The developer, Maison Group, in the Black Sea resort town of Batumi, Georgia, is selling NFTs on OpenSeas. The NFTs are sold as fractional ownership shares in a residential development project which is targeted for completion in 2024. The NFTs represent different amounts of square footage – 290 SF, 592 SF, and 1,507 SF. The developer's marketing material states, "The optimistic forecast is 1,000% + investment income. Pessimistic forecast is 130% of investment income." A project like this in the US would likely run afoul of Security & Exchange Commission rules. I suspect it would trigger the SEC's crowdfunding regulations which require the transactions to take place through an SEC-registered intermediary, limit the amount of crowdfunding offerings, limit the amount for non-accredited investors, and disclose information in SEC filings.
▸ Stablecoin TerraUSD Collapsed and Delisted From Several Exchanges
Stablecoins are a type of cryptocurrency whose price is tied to a stable government-issued currency. Stablecoins are designed to provide predictable pricing in the volatile cryptocurrency world.
There are two broad categories of stablecoins. Tether and USD coin, for example, are backed by assets such as cash, short-term US government securities, and commercial paper.
TerraUSD is different. It is an "algorithmic stablecoin" and is not backed by assets. Instead, it used a system that balanced the value of two coins.
Terra is tied to the US dollar and whenever its value slipped and fell below $1, some of the Terra was removed from the market ("burned") and it was replaced by $1 worth of the company's sister coin, Luna.
The bottomline is that people were allowed to exchange Terra for Luna. It worked well and the market cap reached $41 billion in April.
However, the platform was challenged last weekend when several large withdrawals caused instability. People lost confidence and the price started dropping. It then went into a tailspin.
There was a reserve fund set up to protect against investors pulling out. However, it wasn't adequate to offset the withdrawals.
As I'm writing this, the Terra (Luna) price is light years away from $1.00 per coin. It is $0.00076.
Understand? Sometimes, a simple explanation makes the most sense.
CZ, the CEO of the world's largest crypto exchange Binance, tweeted, "The design flaw: minting coins (printing money) does not create value, it just dilutes the existing coin holders."
The broader crypto community knows what is coming next – regulation.
▸ NFTs for Fundraising – Finally, An Issue That Both Parties Support
The Wall Street Journal reported that some mid-term candidates are using NFTs to raise campaign money. Candidates are still required to comply with the Federal Election Commission's rules, but it's a new a way to reach an untapped voter pool.
A successful NFT launch can be much more efficient than phone calls and typical in-person fundraising events.
The candidates featured in the WSJ article are Shrina Kurani, Blake Masters, and Steven Olikara.
▸ US Treasury Sec. Yellen on Digital Currency and Stablecoins Sec. Janet Yellen underscored the need for Treasury to study the pros and cons of a Central Bank Digital Currency (CBDC). Yellen was testifying at a U.S. Senate panel on Tuesday as the stablecoin market was plummeting. She said
stablecoins are "a rapidly growing product, and that there are risks to financial stability, and we need a framework that's appropriate." Sen. Pat Toomey drew a distinction between Terra, the stablecoin that was in a free fall, with other stablecoins. Terra is an algorithmic stablecoin that "is not backed by cash or securities." Yellen acknowledged that this an important distinction.
CRYPTO CLASS – NETWORK EFFECT
Network effect is a term in economics that describe how the value of a service or good may depend upon the number of users. As more users join the network, the network becomes more valuable to other users.
When the telephone was invented, its value increased as more people purchased phones. When cell phones, social media platforms, and smart phones launched, their success hinged upon the size of their networks.
To illustrate this concept, two phones make one connection, five phone have 10 connections. Twelve phones make 66 connections. With 100 phones, there are 4,950 possible connections.
Cryptocurrency protocols like Bitcoin, have strong network effects.
However, a company that grows through strong network effects, is not invincible. At some point, enough users could abandon Facebook or Amazon and weaken their network.
Assessing the strength of Bitcoin network effect involves looking at a long list of factors, such as investor holding periods, adoption of Bitcoin, and engagement. The crypto network is strong.
INFLUENCERS - People to follow
Matt Levine – @matt_levine
Levine is a Bloomberg Opinion columnists who sends out frequent emails entitled Money Stuff. The emails are free and always insightful, witty, and sometimes laugh-out-loud funny. I don't always agree with him, but I always learn something new.
RESOURCES – Books, websites, podcasts, articles
Wall Street Journal In addition to crypto books, articles, podcasts, and tweets, I always comb through the main business publications. The WSJ has great financial reporters who have a deep understanding of crypto.
CRYPTO WORDS – STABLECOINS
Cryptocurrencies are notoriously volatile and that makes it challenging for parties to transact in crypto. Stablecoins have a value pegged to a stable currency such as the US dollar. One stable coin equals one dollar. Also, stablecoins trade fast and don't have multi-day delays that occur with government issued currencies.
OH, ONE MORE THING – Opportunist traders (wait, aren't all traders opportunistic?) are still betting on a short-term price recovery from TerraUSD. All this is occurring while Terra's creator is trying to save the platform. This reminds me of the Monty Python and the Holy Grail movie scene – "I'm not dead yet!"
Thanks for reading! See you next week.
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