When the going gets tough, investors are said to grip to “safe haven” assets like gold, which is supposed to either retain or increase in value amid economic downturns. Avid Bitcoin supporters have contended that BTC in one of these assets, and that it will perform best in a crisis scenario. That’s where Bitcoin gets its “digital gold” nickname.
As you’re aware, the world fell apart this month. Stock markets suffered their worst free-falls in recent history. Hundreds of billions of dollars were wiped off the table in colossal sell-offs as pandemic fears intensified.
Some traders hoped that would bring good news to crypto. It didn’t. On March 12th, Bitcoin suffered its worst one-day plunge in years, falling from $7,600 to $5.3K.
The crypto crash, dubbed Black Thursday, reignited the debate over whether cryptos belong to the “safe haven” asset class, or whether they are otherwise highly-volatile speculative assets like tech stocks.
Everyone has an opinion. Only time will reveal the true answer.
One point that we should all remember is that during the 2008 global financial crisis, the price of gold initially plunged too. However over the next 18 months, gold rebounded and recovered while stocks continued to decline. (The price of gold also fell this month.)
We should also remember that crypto is less liquid than other assets, making it more volatile and sensitive to short-term price swings. Also, any speculators who created leveraged-long positions in anticipation of a new bull-run cycle would have been epically liquidated when the price fell, adding fuel to fire, pushing the market down further.
Some believe — including me — that crypto isn’t a magical hedge against any type of crisis. Rather, crypto is a hedge against fiat currency. Inflationary environments will be the real test for the “safe haven” argument.
The Maker Protocol was put under extreme stress during the Black Thursday market crash. DAI is a dollar-pegged stablecoin backed by crypto. Borrowers mint DAI by depositing 150% collateral (in ETH or BAT) to a “vault”.
Usually, when the price of ETH falls so that a vault is no longer fully overcollateralized, a “Collateral Auction” can trigger. Under the system, other users can initiate the liquidation process by calling the smart contract, and then competing for the vault’s collateral by bidding in DAI. The auction works so that the winners end up receiving a discount on the underlying collateral, and the outstanding debt is reimbursed to the protocol.
When the price of ETH fell dramatically, many vaults suddenly became available for liquidation, which is expected. However at the same time the price of gas (Ethereum’s network fee unit) surged, making it difficult to submit transactions to the blockchain.
These chaotic conditions caused there to be nearly zero Collateral Auction activity. One user took advantage of the lack of competition by triggering liquidations and bidding $0 on the underlying ETH of several vaults. Without higher bids, over 2-3 hours the user was able to liquidate multiple vaults for free.
As a consequence, the dollar-pegged stablecoin now had $4 million not backed by underlying assets. “Some vaults were liquidated with 0 DAI coming back in the system, resulting in a net loss for the system,” wrote a MakerDAO community member.
To resolve the problem, MakerDAO conducted an auction of MKR in exchange for DAI in order to recapitalize the under-collateralized $4 million debt.
This was an important stress-test of DAI, with lessons learned. After the event, the community was quick to propose and vote on a set of parameter changes to prevent a similar situation from occurring in the future.
In the United States, the Winklevoss twins and Coinbase CEO Brian Armstrong have backed a new political action committee (PAC) called HODLpac. HODLpac aims to support current and future members of the United States Congress who advocate for the adoption of cryptocurrencies and decentralized technology.
Unlike other PACs, the HODLpac will be governed in a decentralized manner like a DAO. When a contributor donates one dollar, they earn a HODLvote token which can be used to vote for candidates or causes. These points cost the square number of HODLvotes, which should reduce the advantage of wealthier members.
However, this voting system appears to still be vulnerable to Sybil attacks.
The information in this newsletter is not intended to constitute legal, financial or investment advice and should not be construed or relied upon as such. Any opinions reflected are the opinion of the author(s) of the newsletter only and not necessarily LocalEthereum Pty Ltd. We recommend that before making any commitment of a legal or financial nature you should seek independent advice from a qualified legal, financial or investment adviser.