By Lisa Pauline Mattackal and Medha Singh

(Reuters) – A crypto platform’s pledge to raise $10 billion worth of bitcoin to back its own “stablecoin” is boosting the market. This is part of a larger movement to crown bitcoin as the reserve currency of a new era.

Seoul-based Terraform Labs has so far amassed nearly 40,000 bitcoins worth $1.7 billion in a series of purchases through nonprofit subsidiary Luna Foundation Guard, data shows. publicly available blockchains.

The frenzy follows Terraform co-founder Do Kwon’s announcement on Twitter last month https://twitter.com/stablekwon/status/1506278298883706882 that the project would buy the $10 billion in bitcoin reserves to support TerraUSD , breaking ranks with other big stablecoins – a bloated class of cryptocurrencies that aim to minimize wild price swings and are usually backed by US dollar reserves.

According to Kwon, a stablecoin backed by bitcoin reserves “will usher in a new monetary era of the bitcoin standard,” referring to the gold standard that formed the backbone of global finance around a century ago.

The acquisitions, and the anticipation of more to come, are supporting bitcoin’s price, with some market participants identifying them as a big driver of bitcoin’s rally towards $48,000 in late March. Most important, perhaps, is whether others will follow Terraform’s lead.

“Buying for $10 billion can swing the price in the short term,” said Sid Powell, CEO of Sydney-based crypto lender Maple Finance. “But over a longer period, that’s more what it signals – that bitcoin was introduced as the hottest form of currency collateral.”

Still, other market participants have warned that an increasingly tight embrace between bitcoin and stablecoins like TerraUSD could introduce new risk to crypto markets, raising the prospect of a “spiral of death” for investors all the way.

Either way, it’ll be worth watching.

In the short term too, there are pitfalls.

“There is a danger that some people will try to get into position long before the buy, which could exaggerate a drop if the price starts to come back,” said Richard Usher, head of OTC trading at crypto firm BCB Group. London, which attributed the bitcoin gains last. months to an improving risk environment.

Vetle Lunde, an analyst at Norwegian crypto research firm Arcane Research who tracks Terra project purchases, estimates that to reach $10 billion in reserves, it could eventually hold between 60,000 and 70,000 bitcoins.

This would exceed the 43,200 bitcoins of Tesla https://bitcointreasuries.net, the public company with the second largest stock of bitcoins behind MicroStrategy.

Terraform Labs did not respond to a request for comment.

LFG bitcoin purchases https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrqbyovm/qjpV7lPP.png

EARTH AND MOON

Stablecoins are rapidly gaining ground. It is a common medium of exchange and often used by traders looking to move funds and speculate on other cryptocurrencies.

For example, it is much easier to exchange tether – the largest and most mature stablecoin – for bitcoin or another crypto, than to exchange US dollars for bitcoin.

A year ago, tether’s market cap was $44.5 billion, while TerraUSD’s was $1.76 billion. They have since risen by around 85% and 850% respectively to $82.3 billion and $16.7 billion, according to CoinMarketCap.

TerraUSD is now the fourth largest stablecoin and, like its peers, is pegged to the dollar. However, while Tether and USD Coin have reserves of traditional assets that they believe match the value of the tokens in circulation, TerraUSD maintains its 1:1 dollar peg through an algorithm that moderates supply and demand. in a complex process that involves the use of another balancing token, Luna.

Bitcoin reserves theoretically add another level of reassurance, while keeping the Terra project decentralized.

“Backing it up with something so predictable – not from a price point of view but from a rules and governance point of view – because bitcoin brings a lot of trust to people,” said Matthew Sigel, head of the digital asset research at VanEck in New York.

He said he expects other algorithmic stablecoins to follow Terra’s lead and back their coins with reserves of bitcoin, and even other crypto tokens, if the experiment is successful.

THE SPIRAL OF DEATH

However, not all algorithmic stablecoins have been stable in the past, with some losing their peg and plummeting in value.

“There is still a lot of work to do and regulatory uncertainties to overcome regarding algorithmic stablecoins and their resistance to a contraction collapse, which could cause a so-called ‘death spiral,'” said Carlos Gonzalez Campo, analyst at 21Shares in Switzerland. .

“This phenomenon refers to a theoretical vicious circle where contraction of UST (TerraUSD) leads to LUNA being minted and its price falling, leading to fear and more UST redemptions,” he said, likening it to a bank run.

This is what the bitcoin stash is meant to prevent, but it could also cause wider contagion.

“It’s far better to have a reserve outside of luna because otherwise you’re very exposed to its performance and it can break everything like we’ve seen with other algorithmic stablecoins,” Arcane’s Lunde said. .

“But I’m a bit concerned about the long-term structural effects this might have on Luna and on Bitcoin. If things really start to break down and they have 70,000 bitcoins in reserve that they want to use to settle the market and maintain peg, that could have implications for the whole market.

(Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru; Editing by Alun John and Pravin Char)