Opinions expressed by Digital Journal contributors are their own.
The sudden collapse of Terra’s UST coin, which wiped out almost US$45 billion of market capitalization in the space of a week, has served to unite crypto skeptics and cynics desperate to see the end of such digital assets.
Apocalyptic headlines swiftly appeared in outlets across the globe, announcing the death of the entire cryptocurrency industry and jumping on the occasion to denounce cryptocurrency itself as a Ponzi scheme, sending countless investors into full panic mode.
Reading beyond these provocative headlines, it’s little wonder the articles in question are authored by individuals with no understanding of digital assets whatsoever, who fail to mention any aspect of blockchain technology in their sophisticated analysis of the future of cryptocurrencies.
What exactly happened to Terra UST, then, and why has it led to so much alarm?
Firstly, it is not a catastrophe for the cryptocurrency industry. Secondly, crypto isn’t going anywhere. Bitcoin, as the most notorious example, has already bounced back from its 18-month price low last weekend.
Terra is a blockchain, much like Bitcoin or Ethereum. Its coin, UST, was designed to mirror the actual value of the US dollar, in order to make it immune to the volatility which concerns many cryptocurrency investors. Coins like these, which are pegged to the US dollar, are referred to as “stablecoins”. These allow traders to avoid the expensive and laborious process of converting more volatile assets into hard currency.
There are two ways in which stablecoins can mirror the actual value of the US dollar. The first is by being fully backed by reserves of hard currency. The second method employs an algorithmic system which fully relies on code, perpetual market activity, and blind faith to maintain the coin’s value.
I will let readers guess which of these led to Terra’s coin crashing by more than 99% this month.
There is an important lesson to be learned here. I feel genuinely sorry for all who lost their entire life savings in the UST crash, but it all boils down to the age-old investment advice: never invest more than you can afford to lose and don’t have blind faith in any project, no matter how solid it may seem.
The crash has highlighted the need to roll out policies which support genuinely stable coins, that are pegged to real currency in a meaningful way. Take Himalaya Exchange, for example, which I founded to empower individuals with true financial liberty. Its stable coin, the Himalaya Dollar, is fixed to the US dollar 1:1 with a 100% backing of a reserve consisting of only USD assets, which are audited regularly. As such, it is the only existing viable stablecoin that has retained its value against the US dollar for the whole period and certainly in recent weeks.
We have indeed witnessed a watershed moment for the crypto industry: one which has flushed out exchanges that use jargon and overambitious promises of avant-garde algorithms to mask their fundamental flaws.
Forward-looking cryptocurrency exchanges and investors must return to the three basic functions of money: a medium of exchange, a unit of account, and a store of value. What is the purpose of offering a coin which has no meaningful value – in the case of Terra, one backed by an algorithm which simply ties it to another cryptocurrency?
It is possible for exchanges to meaningfully mirror the function of traditional money by providing self-sufficient ecosystems. In the case of the Himalaya Exchange, for example, it combines a stable coin (Himalaya Dollar ‘HDO’), a native trading coin (Himalaya Coin ‘HCN’), and a payment application (Himalaya Pay).
The UST crash is not an existential threat to cryptocurrency. However, we must take this opportunity to redirect the future of digital asset investment. We should all focus on fostering a crypto world with coins of real value, based on reserve backing. Only then will digital assets engender complete trust and reliability for investors.
