Overall Market Assessment: Economics, Policy, and Stablecoins
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Whether you call it a bear market, crypto winter, or an overall crash, the recent market fluctuations have spooked many, vindicated some, and left others unbothered. Most news outlets will report that the downward trend of the crypto market is indicative of the instability in the industry, further contradicting supporters' claim that BTC and other cryptocurrencies are good alternative investments to hedge inflation. On the other hand, it could be argued that this still fledgling industry is just beginning to hurdle its largest barriers of entry into the mainstream, and this is merely a stage in its development. Whichever direction you lean, let's examine the driving force behind these large swings.
The Economy
The biggest contributor to market movements is undoubtedly the global economic health–which is, in a word, declining. Commodity prices, supply shocks, and the ongoing war between Russia and Ukraine have disrupted the recovery of the post-pandemic economy by increasing inflation and forcing central banks to take more drastic policy measures. This week, meetings for the Federal Reserve’s Federal Open Market Committee (FOMC), Bank of Japan (BOJ), European Central Bank (ECB), and Bank of England (BOE) will take place and address how to tackle debt, bond markets, inflation, and interest rate hikes. The ECB called an emergency meeting to address the rising bond yields and potential fragmentation risk within the European Economic Area. The complicated task of enforcing a policy that does not adversely affect one state more than another is what the ECB must now tackle, especially with regard to Germany and southern member states Italy and Greece. For the ECB, BOJ, and BOE interest rate hikes have been modest, sitting between 25 and 50 basis points, while the FOMC just announced a 75 basis point increase for June. These increases are likely in response to the growing CPI rate, which in the U.S. just hit a 40-year high of 8.6% for May.
Policy
One of the largest inhibitors to the development of the crypto space has been the legal ambiguity within which it operates. While many smaller countries have passed legislation pertaining to cryptocurrencies and other digital assets, there’s yet to be any meaningful guidance from the larger developed economies. Currently, one bipartisan bill introduced to Congress in the U.S. attempts the ambitious goal of both defining digital assets and their respective agency jurisdiction. Unfortunately, it is also unlikely the bill will see a vote before the year is out. Nevertheless, stablecoins may be first on the agenda of any legislative pursuit as it is proving to be the Achilles heels of the crypto world and another large driving force behind the downturn in the market.
Stablecoins
A third, and very pertinent force behind the market movements is due to stablecoins, their supporting companies, and the liquid capital backing their 1-1 fiat currency peg. The crash last month of the algorithmic stablecoin TerraUSD (UST) initially forced a $326 billion loss in the overall crypto market cap. Since then, the skepticism over stablecoins has been high. Tether (USDT) has subsequently dipped below its $1 valuation peg with the USD at various times. Although it has seemingly recovered, despite a few further dips, the concern now turns to another algorithmic stablecoin Tron (USDD). Since Monday, USDD began to fall under $1 and continues this trend despite a $2 billion dollar effort to uphold its peg by the Tron DAO. A failure of another stablecoin backed by the liquid of other cryptocurrencies will create large dips and cut market cap in a way that will be felt across the entire ecosystem.