Macro Bytes: Cryptocurrencies

In this episode, our hosts Luke Bartholomew and Paul Diggle discuss the recent collapse of a large crypto asset project, and the knock-on effects on the wider crypto market with Jonathan Hobbs from Finimize.

The key takeaways are:

·         The collapse of the algorithmic stablecoin Terra and associated coin Luna was caused by design flaws in its supposed stabilisation mechanism, exposed by a rising rates regime, which invited speculative attack

·         The financial challenges involved in maintaining a stablecoin resemble those of maintaining an fx peg, preserving convertibility at par in a money market fund, and fractional reserve banking. These are well understood problems in traditional finance, and may involve some degree of regulation as part of their solution

·         As such, this collapse is likely to increase regulatory attention on the crypto space, but the technology moves faster than regulators. Regulation may be a pre-condition for widespread institutional involvement in crypto

·         Bitcoin does not seem to be functioning as a diversifier and inflation hedge in this environment, potentially undermining its appeal within a wider portfolio. However, the collapse of weaker crypto assets may increase the appeal of more established coins