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Implications of "ETH Killer" Terra's failure

Commentaries & Views

Well folks, the last two weeks have been one of those weeks in crypto.

The kind we all know is inevitable at some point, but is somehow still gut-wrenching and utterly unwelcome when it arrives.

As I write this on May 16, 2022, Bitcoin is down about 22% over the last 14 days. Ethereum is down around 25% over the same period.

But the real damage has been inflicted on smaller altcoins. Especially the so-called "ETH killers".

TerraUSD: The Catalyst

Exhibit A is Terra (LUNA), which appears to be the primary cause of the current selloff.

Terra is (was) a well-funded project designed to challenge Ethereum's dominance in stablecoins. Before LUNA's crash, it had a massive $40 billion+ market cap. Its "sister stablecoin", UST, had a market cap of more than $18 billion.

As recently as May 7, 2022, Terra founder Do Kwon was on Twitter bragging about how Terra critics are "all now poor" due to missing out on LUNA's huge gains.

Now its collapse has triggered a wave of selling across crypto markets.

Terra was a controversial but rising star in the crypto world. The project was built around a popular "algorithmic" stablecoin called TerraUSD (UST). Unlike the leading stablecoins such as Tether (USDT) and USDC, UST was not backed by or redeemable for US dollars. It was algorithmic.

Terra's UST stablecoin was designed to be "pegged" at a $1 price. It sought to maintain that price by building incentives for traders to balance supply and demand through burning or minting coins. Users could convert 1 UST to $1 worth of Terra (which has a floating price).

Terra's formerly-stable-coin UST trades at $.09 as of May 16, 2022 at noon EST. It turns out the whole thing was built on a very shaky foundation.

To attract investors to use UST, Terra helped build a platform called Anchor which allowed users to collect up to 20% annual yields on their UST holdings. Part of that yield came from borrowers, but most was subsidized by Terra in order to gain market share from Ethereum-based competitors.

It turns out Terra's numerous critics had been correct, and the system was not sustainable. In the last week the ecosystem experienced something like a bank-run. The price of UST "de-pegged" from $1, triggering automatic sales of LUNA, and a spiral collapse quickly followed. Many investors lost all or most of their ecosystem holdings. We offer anyone affected by this our sincere condolences.

Fully 75% of all UST stablecoins were locked on the Anchor platform when the problems began. The future of UST is murky, but it seems unlikely to be able to regain its $1 price, due to the fact that LUNA has collapsed to basically nothing. It can no longer support UST's peg. The whole network is likely kaput.

In Terra's fallout, there has been some concern over the stability of stablecoins such as USDT and USDC, but these are backed by huge firms and can be easily redeemed for dollars. The problems faced by Terra don't really apply.

Dragging Down The Market, For Now

One of the interesting twists to this story is the Luna Foundation Guard (LFG) owned about $1.5 billion worth of Bitcoin. Most of the coins were purchased recently, with a goal of providing additional backing to UST (the BTC could be sold to support UST if necessary).

However, their relatively small Bitcoin reserves were quickly exhausted in the attempt to defend the peg. LFG selling their BTC reserves likely contributed to the broader selloff.

With Terra's collapse, it appears another "Eth killer" offering interest rates that were too good to be true has fallen.

Other formerly high-flying ETH competitors include Cardano, down about 82% from its 2021 high. Its long-awaited smart contract platform remains in limbo.

In the short run, Bitcoin and Ethereum were both hurt (price-wise) by the failure of Terra and TerraUSD. But they aren't down nearly as much as many smaller, more speculative coins. And in the long run it may help BTC and ETH cement their places at the top dogs in their respective specialties (digital gold and smart contracts).

HIVE's Strategy

If we do see a prolonged downturn here, I believe HIVE is well positioned to weather it. Let's go through a few key points.

HIVE remains highly profitable. We estimate that the company could remain net-profitable if Bitcoin fell to $8,000 and Ethereum to $400, for a period of one year.

First of all, HIVE runs very lean with only 19 full-time employees. We expand our workforce as needed through trusted contractor partnerships built over the last 5 years.

We also own the majority of the facilities we operate in, and we think these operations are located in ideal geographies. HIVE's fleet of Bitcoin miners is among the newest and most efficient in the business.

We're one of the few publicly-traded miners which mines Ethereum, and HIVE's executive team has correctly predicted that the proof-of-stake "merge" would be delayed since 2017. Unlike most other miners, we have consistently refreshed our ETH mining hardware due to the rapid payback period, and what we saw as a high likelihood of additional delays implementing PoS. Due to limited competition, ETH mining has far higher margins than Bitcoin.

Sharp periodic downturns are inevitable in the crypto world, so HIVE maintains a strong balance sheet. In our most recent quarter we reported $64 million of cash on our books. The company has been strategically selling ETH and ETC to finance operations and be able to quickly capitalize on opportunities.


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.