Could This REALLY Happen With Bitcoin?!
About a week ago, the IMF released a paper that looked at the “Stealth Erosion” of dollar dominance as a reserve asset. It was a really fascinating read that explained how over the past few decades, the dollar has become less of a desirable asset to hold by central banks.
They explained how the rise of “non traditional” assets has led to a diversification of the dollar hegemony we have seen since the collapse of the gold standard in the 1970s.
So, why should this interest you?
Well, the paper is being released at a time when faith in the security of dollar FX reserves is at an all-time low. And, as these large central banks start to shift to these non-traditional assets, there is a significant chance that they could diversify into digital assets.
This is all covered in my video today. I break down the report and take you through some of the most illuminating data explaining exactly what this could mean for the dollar and Bitcoin’s eventual role in the new world order.
You can watch that here.
📊 Main Portfolio 📊
No changes to the portfolio this week. Pretty happy with the broader allocation. I am considering diversifying a bit more into additional layer 1 alternatives - but will keep you guys updated in my Telegram channel.
ETH 30.61% | BTC 21.29% | SOL 10.27% | DOT 6.93% | ATOM 5.50% | RUNE 4.29% | UST 3.88% | LUNA 3.19% | APE 3.01% | FTM 1.97% | AR 1.76% | ADA 1.68% | HNT 1.57% | MATIC 1.34% | INJ 1.01% | LINK 0.70% | YGG 0.62% | XDEFI 0.37%
🖼 NFT Portfolio 🖼
MAYC 93.88% | Meebit 6.12%
📈 Thoughts on Market 📈
This week’s crypto market made me think about something that was said by Bob Loukas, one of my favourite crypto YouTubers. Bob basically said that as we approach the top of the current bull market, there will be unprecedented volatility; 10-20% or more to the upside and downside within days, sometimes hours. I reckon it’s quite possible we are entering this phase.
Bob isn’t the only reason I believe this either. I recently came across another incredible crypto related channel called Game of Trades. These guys have been doing some pretty hardcore research on both the stock market and the crypto market, and their thesis is that we could be entering something called a ‘market melt-up’ in both stocks and crypto.
According to Investopedia, a market melt-up is when assets rise purely because of speculation and not at all because of fundamentals. You could argue this has been the case for years, but what makes market melt-ups different is that they typically don’t have very much trading behind them, and they tend to happen during extremely uncertain times like we have now.
In terms of timeline, we could potentially be looking at months of upside volatility which sounds crazy, but is actually consistent with historical trends. As pointed out by Game of Trades in this video, when the yield curve inverted in 2006 and 2018 (an indicator of a market crash), the markets had one last big rally before the “real” crash came in. Well, the yield curve just inverted.
There is of course no shortage of crypto-specific factors affecting the market. For starters there’s India, whose recently passed crypto tax law went into effect on April 1st. It’s believed that many Indian crypto investors sold just before midnight the day before so they could claim capital losses (since it’s not allowed under the new law), and bought back in the next day (looks like it!).
Next there’s the European Union, which passed its own anti-crypto law on Thursday. As I mentioned in last week’s crypto review, this law requires cryptocurrency exchanges to collect detailed information about any crypto withdrawals to external wallets worth more than 1000 EUR (~1100 USD). Not surprisingly, this seems to have spooked the crypto market (for a day).
Last but not least, we have Terra’s Luna Foundation Guard which has been aggressively accumulating BTC since the end of March. This buying pressure seems to have propped up the crypto market as a whole, and has led to an impressive rally for Terra’s LUNA. The LFG’s Bitcoin wallet now holds more than 1.4 billion dollars worth of BTC, and it’s only the beginning…
💲 Terra’s Bitcoin Treasury 💲
When Terra’s Luna Foundation Guard first announced it had raised 1 billion dollars from various crypto VCs to create a Bitcoin treasury to back UST at the end of February, I was honestly a bit sceptical. This is mainly because there weren’t many details about how it would work. Over the last week or so however, Terra founder Do Kwon has come out to explain.
First, a bit of context. Terra brands itself as an ecosystem of decentralised stablecoins collateralised by LUNA, the largest and most popular of which is UST. Because 1 dollar’s worth of LUNA can always be burned to mint 1 UST and vice versa. This creates an incentive for arbitrate traders to maintain UST’s 1 dollar peg. More about Terra here if you want the details.
Obviously, Terra’s mint and burn mechanism works pretty well when the crypto market is going up. This is mainly because there’s lots of demand for leverage - in the form of stablecoins such as UST - when markets are rallying. Logically, the inverse is true when the crypto market is crashing. Arbitrage traders then cash out under pegged UST for LUNA, causing LUNA to crash even more.
As Do explained in a recent interview with Laura Shin, the risk of this so-called ‘death spiral’ is unfortunately ever-present with algorithmic stablecoins such as Terra’s UST. Do believes that this risk is preferable to the counterparty risk you get with centralised stablecoins (which can be frozen by their issuers) and I happen to agree, which is why I hold UST.
Naturally, the purpose of the LFG’s Bitcoin treasury is to help prevent this death spiral from occurring. The reason why the LFG is using BTC is because it’s a neutral and trusted asset in the crypto industry. Having UST partially backed by BTC will increase trust in UST outside of Terra's ecosystem, and it will also help mitigate any manipulation of UST’s peg on other chains.
So, how will it work?
Well, the LFG is planning to acquire another 1.5 billion dollars of BTC in the coming weeks. After that, the goal is to accumulate at least 10 billion dollars worth of BTC. In another recent interview with Blockworks, Do explained that this additional 10 billion dollars will be accumulated by directing a portion of Terra’s seigniorage fees for UST minting and burning towards buying BTC.
Once 10 billion dollars of BTC has been accumulated, the LFG will put all that BTC into a smart contract and create a special decentralised exchange on Terra that will make it possible to mint 1 UST using 1 dollars worth of BTC and also claim 1 dollar’s worth of BTC by burning 1 UST. The exact mechanism is outside the scope of this newsletter, but you can learn more about it here.
This begs the question of what this all means for LUNA, but I reckon people are forgetting about what it could mean for BTC. As far as LUNA goes, it really depends on the design of the seigniorage mechanism which is being actively discussed in Terra’s forum. In the short term, it’s likely to have a negative effect on LUNA, especially since the LFG is selling LUNA to buy BTC.
In the long term however, the increased confidence in UST should theoretically result in even more demand, and Do argues this increased demand will outweigh the decreased price effects caused by Terra’s seigniorage mechanism on LUNA (mainly burning LUNA out of circulation). It’s also important to note that Terra’s Anchor Protocol is starting to expand to other chains as well.
When it comes to BTC, LFG is explicitly looking for Terra to become the largest single wallet holder of BTC in the world. This will of course do wonders for UST, but it would potentially put the price of BTC at risk, especially if UST’s market cap ever enters the hundreds of billions. A run on the bank of that scale could cause some serious sell pressure, but I reckon BTC would recover.
🤷🏻♂️ $625m Hack. What’s Next 🤷🏻♂️
Last week, we had the largest hack in DeFi history take place. This was the Ronin SideChain bridge that saw $625m in ETH & USDC exfiltrated. This was even larger than the Poly Network hack that took place last year.
This has once again provided fodder for the Mainstream Media to point out the “inherent risks” that come from cryptocurrencies. I can also see this being relayed in hearings on Capitol Hill as the usual anti-crypto zealots have their say.
However, I happen to think that this could be a long-term net positive for the crypto industry, and that comes down to a few factors which are likely to play out.
Firstly, it’s worth understanding exactly what this hack was.
It was a hack of a bridge between two blockchains (Ronin & Ethereum). The hacker was able to get access to the private keys of 5 of the required keys out of the total 9 validators on the Ronin network. It was an exploit that took advantage of Ronin’s centralisation. Centralisation in both the way that they authorised transactions (the 5 threshold is really low) but also in who those validators were (4 of them were Sky Mavis validators).
What that essentially means is that once the attacker was able to breach the Sky Mavis systems, they got the keys to the kingdom (no pun intended). That’s because on top of the 4 Sky Mavis validators, they were also able to get access to the Axie DAO validator through the gas free RPC. I encourage you to read through their disclosure if you want more info on how it happened.
But, what this does show us is that despite the scalability benefits that come from more centralised blockchains, they do have these severe security risks. When you have a centralised network, there is more scope for attackers to gain control and manipulate it. And it’s worth noting that one of the first steps that Sky Mavis will embark on is setting validator thresholds at 8 instead of 5.
This is a long-term win for the virtues of decentralisation.
Apart from that, this event is going to mean that a lot more scrutiny will be placed on cross-chain bridges. It’s been less than a month since we had that massive Wormhole bridge hack that saw over $321m pilfered.
It’s worth noting that the risk of bridge exploits is something that Vitalik himself has talked about. Presciently, in a response to a post on Reddit, Vitalik raised the alarm over the security of these bridges. So, if the warnings about the limits of these bridges were not enough to convince the community, a billion dollars in hacks will. In both cases, users will be made whole so the only losing parties are those who build the bridges.
This is a win for security because it means that developers will put a lot more care into the design of these bridges.
Finally, what appears to be likely from this hack is the fact that the attacker is going to have a hard time hiding those funds or enjoying them. Given the power of blockchain tracking tools, those funds are more tainted than Russian oil in a North Korean tanker. Most of the funds remain in the hacker's wallet and any attempts to move them to a centralised exchange are blocked and immediately studied.
There is a high likelihood that either the hacker is caught, he abandons his loot or he decides to send it back. There is a reason that the Poly Network hacker decided to return all the funds that he stole last year.
So, what this shows is that despite the media perception of crypto hacks, hiding stolen cryptocurrency is near impossible. It will also deter other hackers in the future who might be considering such audacious thefts.
🔥 Deal of The Week 🔥
So, it has been a while since my last merch drop. I am sure that has been of great disappointment to those that want to flex some hot crypto t-shirts and hoodies. But fear not, I have been solving a few supply chain issues behind the scenes and I’ve finally been able to stock the shelves at Coin Bureau HQ with a bunch of new designs! Here they are…
👨 Mens Crypto Merch
- Hoodie (white): Crypto Bubble
- Hoodie (white): Evolution of money
- T-shirt (white): Crypto bubble - my top pick ⭐
- T-shirt (black): ETH word game
- T-shirt (white): ETH word game
👩 Ladies Crypto Merch
- Sweater (white): Cryptoverse - exclusive ladies design ⭐
- T-shirt (white): ETH evolution
- T-shirt (black): 21 million club
- T-shirt (black): Bitcoin roller guy
- T-shirt (white): Not a financial advisor
I would like to thank everyone who decides to support Team Coin Bureau by buying our merch in our store. As many of you know, that’s one of the main ways that we are able to keep the channel ad free 🙏
🔮 Video Pipeline 🔮
- Cryptos That Will Survive the Bear market
- Bitcoin Legal Tender: Which Countries Are Next?
- Financial Scandal Of The Year
- MoonBeam (GLMR): Will it beam you up?
- Chainalysis Crypto Crime Report
- VeChain update: Is VET still worth it?
- Netflix crypto documentary: My take!
🏆 What's New At CoinBureau.com This Week? 🏆
✅ 1inch Exchange Review: Leading DEX Aggregator
✅ NEXO Lending Review: Instant Crypto Backed Loans
✅ BlockFi Review: Complete Lending Platform Overview
✅ Rubic (RBC): DeFi For The Masses!
✅ BlockFi vs Nexo: Battle of the Lending Platforms
That’s all for this newsletter. However, I would like to thank you guys for helping the channel hit that crazy 2 million subscriber mark!
What a crazy journey it has been so far. I could have never in a million years believed this was possible, back when I was ironing greenscreens in my bedroom.
Thanks so much for the support, it means so much to everyone at the Bureau.
Guy your crypto guy
Guy is one of the founding members and face of the Coin Bureau. Like many of us, he is just an average joe who became “crypto curious” back in 2013. After recognising the potential of blockchain technology, Guy set off on a mission to create crypto educational content, working with others to start the Coin Bureau website and released our first video on YouTube in 2019. You can learn more about him in his Who is Guy? blogpost.