In Marvel Comics, the Universal Church of Truth is a reoccurring villain that brings ruin to any society that doesn’t agree to believe in their dark purpose - worshipping the evil “Magus” (the dark half of the hero Adam Warlock). Those who agree to believe are promised prosperity and stability in return for their participation in fueling the Church’s “faith generators” - batteries powered entirely by one’s belief in Magus. When that faith is shaken, they lose energy - which leads the Church to use any means necessary to convert people to and sustain its dogma.
The cryptocurrency industry has a similar problem because it has fundamentally no purpose other than to continue existing. Bitcoin is not a great store of value (as I’ll get into shortly), nor is it an efficient way to send money, nor is it particularly innovative. Ethereum claims to be “software” but seems to completely collapse when it’s charged with operating in any way that resembles the systems it claims to replace…and still has no real fundamental reason to be worth thousands of dollars. The underlying fabric of cryptocurrency isn’t just volatility - it’s a belief system of manipulated money and dogma that allows the top-line participants to control those below by promising that they “are going to make it.”
One particularly specific example of belief-based currencies are stablecoins. While, in theory these are the most “stable” of cryptocurrencies - theoretically matched to the price of one US dollar (one token = one exact US dollar in a bank somewhere) - they are often based on something else, like Tether (which I discuss here), which (despite them claiming otherwise) is backed by a combination of money, loans, and certificates of deposit.
Yet people still transact in Tether and will only buy or sell in it if it’s around a dollar - despite the underlying assets being questionable - because of an unspoken, industry-wide zealotry that says, “we all agree this is worth this, based on a few facts and a lot of faith.” These are not qualitative evaluations, and in any other industry, this would be exceedingly illegal (if it were described in the terms that Tether uses). Still, in crypto, this is simply the agreement - this is worth a dollar.
Like any great religious con, there’s enough valid data to suggest that filling in the gaps on your own is permissible. It’s also helpful that you’ve got millions of friends, each with their reality-adjacent justifications. If this feels like a cult, it’s because it’s alarmingly close to being one.
The problem with this and any other vibes-based stablecoin is that belief is exceedingly strong up until the moment it isn’t. While the force of unified belief can empower entire economies, cryptocurrency has a specific weakness that makes maintaining the cult problematic - you can’t see exactly who’s doing what, so when belief begins to crumble, there is no way to directly police the actions of those involved, meaning that people can sell whenever they feel like it.
This is the problem that’s currently befalling the cryptocurrency markets, along with the stablecoin UST - the (former) third-largest stablecoin. Terra’s peg to one dollar isn’t based on a single dollar existing, but rather on an algorithmic connection to Terra’s LUNA cryptocurrency (formerly one of the largest cryptocurrencies). Here’s a detailed description (and if you want, an even more detailed description can be found here):
To maintain its stablecoins' equilibrium, Terra mints and burns tokens while also incentivizing arbitrage. Here's what that means:
Before you can buy UST, you'll have to mint some. To do so, you'll pay the going rate in LUNA. The protocol takes those LUNA and burns them, which constricts their supply and makes the price of LUNA go up just a bit. The same works in reverse: to mint LUNA, you'll convert UST stablecoins. Those get burned and the price of UST goes up ever so slightly.
Why might you want to do this? In addition to using the assets for some service or utility, there's a potential arbitrage opportunity. Arbitrageurs—traders who profit from small price discrepancies—help to keep the price of UST in check by selling LUNA for UST when the price of UST is below $1 and buying LUNA when UST is worth more than $1. If, for example, UST slips to $0.95, traders can then buy a bunch at that price but sell it for $1 of LUNA. In doing so, UST supply is reduced and, therefore, the price heads back up.
Terra claimed that the “elasticity” of LUNA’s supply - supply and demand - meant that UST would never fall out of its $1 peg.
Except as you’ve probably worked out it did, and it did so in exactly the way you’d imagine it would. UST’s reliance on traders seeking arbitrage opportunities - being able to buy $1 of UST for $0.98 and sell for $1, for example - was built on an algorithmic level, meaning that if the traders simply didn’t want to play in the sandbox anymore…everything started to unravel.
As of writing, UST is about $51 cents (this number has changed a few times since I started writing this), after bumbling below 30 cents earlier today. Terra itself has a large stockpile of Bitcoin - $3.5 billion worth - that they are prepared to use to attempt to stabilize the value of the currency (by buying it using their stockpile - which has yet to work), which has also scared the market by effectively saying “here’s $3.5 billion of Bitcoin that we are ready to sell at any given moment to protect ourselves.”
I would argue that the markets are also terrified because this is a very public test of everybody’s belief in cryptocurrencies. If faith in these questionably-founded magic money tokens is shaken, people are both less likely to retain the cryptocurrencies they have today and less likely to buy new ones tomorrow. While it’s hard to generalize, I would imagine that many crypto people have chosen to believe that stablecoins are immovable - and on some level, this connects to the fuzzy idea of the “goodness” of free markets taking care of things in a “fair” way.
This is a strange case of facts caring about feelings - of markets that are driven by people’s belief in an ideology, even if said ideology is just a number. Any stablecoin that is not literally linked to a dollar in a bank is corrupt and ridiculous, and yet over $17 billion (for now) of Terra exists, meaning that people have been able to accept that it’s worth $1, or at least that they’ll get $1 for it. While seemingly the most “stable” of cryptocurrencies, Terra and Tether (and any others that aren’t based on a dollar in a bank account) are not based on anything other than faith. The moment you accept the premise that one Terra is not actually worth one dollar and yet transact in it, you are gambling, putting your faith in the vagueness of a system that failed to counter the single most obvious thing that can happen in cryptocurrency (a market crash.)
The reason that this is such an industry-wide scare is that it fundamentally challenges the belief system of cryptocurrency. Once you begin to consider that you shouldn’t believe something is worth a dollar because somebody told you it is, you have to start wondering why things like Cardano, or Solana, or Avalanche are worth anything - aren’t they just fuel? Dogecoin and Shiba Inu already proved that belief can catapult and then destroy the value of a token - but the prevailing belief was that this was just a little fun, a crowd-based market manipulation where some people made a lot of money, rather than stark proof that these markets remain fundamentally illogical.
While one might argue any currency is a belief system, there are at least societal and logical reasons that a dollar is worth a dollar (though I’m sure the worst people alive will argue with me on this one). In the case of every cryptocurrency, its value is driven less by logic and more by a series of fundamental acts of faith, moved by an unseen hand of market manipulators and charlatans. Those who claim to be able to see the future and predict which cryptocurrencies will grow and provide you with otherworldly gains are just another form of the Religious Conmen that cynically combined faith and desperation - except they’ve replaced Jesus with a belief in nothing other than numbers increasing for the righteous and numbers decreasing for those who chose not to believe.
And like all great religious indoctrination, cryptocurrency is empowered by a sense of guilt. Those who lose money are implored not to sell - to simply “hodl” (a reference to this incredible post), because leaving the system (selling) can create ongoing cascade effects as those around you realize that they too can leave, and that perhaps they are not destined for financial heaven - if it even exists.
Terra’s crash is breaking the markets because it’s shattered belief in the spuriously-valued digital assets. Every project in cryptocurrency seems to promise some combination of an algorithm or a DAO or a “great team,” and these vague signifiers are used to propel projects that are “going to make it.” These ideas are religious signifiers - vague enough that they can be explained away when something goes wrong, but solid enough that they can effectively make tokens powered by ideology.
Except these ideas were all tested at once - Terra is well-bankrolled, has a “great team,” has algorithmic tech that was working for a while until it wasn’t, and a partnership with a baseball team. With both UST and LUNA crashing, the reasoning behind the valuations of many other cryptocurrencies are called into question, leaving investors to wonder if they should even dabble in markets that seem to be capable of a full-on collapse in the space of 48 hours.
The real question is whether Terra can be stabilized. If it drops to zero, it could very well blow a hole in the entire market, creating a vortex where investors desperately try and leave the fully nude Emperor’s fashion show. It could stabilize, creating a sense of unease without entirely annihilating the market.
Or it could create a knock-on effect that’s somehow worse. Tether is currently sitting at a hair below $1, and has been for a few hours. It’s wobbled before, but if Tether crashes, a great deal of people are going to get hurt.