First mover Asia_ funds have lost billions in the terra collapse. Here are the ongoing effects; Bitcoin sees red

First mover Asia_ funds have lost billions in the terra collapse. Here are the ongoing effects; Bitcoin sees red

When a fund suffers a big dip in its token, it affects the entire venture funding ecosystem; most major cryptocurrencies fell despite gains in the U.S. equity markets.

Good morning! Here's what happened:

Prices: While stocks had a good day, Bitcoin and other major cryptocurrencies continued to struggle.

Insights: The impact of the terra collapse will continue to ripple through the investment ecosystem.

Technician's take: a brief bounce is likely, similar to late February and late March.


Bitcoin (BTC): $29,137 -3.9%

Ether (ETH): $1,972 -3.5%

Biggest gains

Asset Ticker Returns DACS Sector
Ethereum Classic ETC +3.8% Smart contracts platform

Biggest losers

Asset Ticker Earnings DACS Sector
Algorand ALGO -6.9% Smart contracts platform
Solana SOL -6.6% Platform for smart contracts
Internet computer ICP -5.8% Data processing

Stocks rise, cryptocurrencies fall

What happened to correlation?

While stocks soared in Monday trading, major cryptocurrencies continued their recent slide through the red.

By early afternoon, bitcoin was down nearly 4% in the last 24 hours and was at the lower end of the $29,000 to $30,000 range it had occupied since the implosion of the UST stablecoin and its supporting LUNA token nearly two weeks ago. The largest cryptocurrency by market cap is down 26% from its peak this month at $40,000 and about 55% since hitting its record high last November. Ether, the second largest cryptocurrency by market cap, has fallen about 3.5% over the same period, changing hands just below $2,000.

Most major cryptocurrencies spent much of the day in the red, with AVAX recently down more than 8% and GALA, ALGO and MANA each down more than 6%, as investors remain fearful of inflation and a possible recession if central banks tighten monetary policy. The choppy trading underscores those concerns.

"We didn't have any gains [this week], we didn't have stablecoin losing $48 billion, and we didn't have a presidential executive order," Mark Connors, head of research at 3iQ Digital Asset, told CoinDesk, adding, "It's all about inflation and it's uncertain. So we are rangebound."

Equity markets took a different path, as they have in recent days, rising after senior executives at JPMorgan Chase said the U.S. consumer credit market was in good shape in the short term. The S&P 500, which spent much of Friday in bear market territory, meaning the index was at least 20% below its previous high, rose 1.8%. The Dow Jones Industrial Average and the technology-heavy Nasdaq rose 1.9% and 1.5%, respectively. Last week, the indexes were down nearly 3%.

Cryptocurrencies have spent much of the year tracking stocks, so the recent breakup is at least a small twist in their evolving relationship. 3iQ's Connors said digital assets will remain in a tight trading range at least until the U.S. Department of Labor releases its next Consumer Price Index (CPI) report in early June. The CPI could show whether inflationary pressures are easing.

"Right now there may be some people rattling the markets to see what happens, but I don't think there will be a breakout," Connors said.


S&P 500: 3,973 +1.8%

DJIA: 31,880 +1.9%

Nasdaq: 11,535 +1.5%

Gold: $1,853 +0.4%


The ongoing damage to Terra investors

The destruction of the Terra Protocol has done significant damage to the balance sheets of all Terra investors. Data on the carnage is viewable at Block Explorers, including the staked tokens of Korean VC firm Hashed, which at one point were worth over $3.5 billion.

Hashed's loss on Luna and other tokens in the Terra ecosystem may not have negatively impacted the company's cash position. Hashed received most of those tokens through its investment in Terraform Labs and likely bought more tokens when they peaked - and likely sold some as well.

But for any liquid crypto fund, cash is fringe. Cash is boring. Cash doesn't have the same leverage.

To understand the importance of cryptocurrencies in the VC balance sheet - and why they are so important to Hashed - let's look at how Singapore-based Three Arrows Capital built a $1.2 billion position (using January 2021 pricing) in Grayscale Bitcoin Trust (GBTC) (New York-based Grayscale is part of Digital Currency Group, CoinDesk's parent company).

Three Arrows Capital has a license to manage assets of no more than SGD250 million (US$181 million) for its Singapore branch, according to a filing with the Monetary Authority of Singapore. Three Arrows Capital also has a branch in the British Virgin Islands, with which it has split the GBTC position equally, according to U.S. Securities and Exchange Commission filings. Even the 50-50 split would exceed the amount Three Arrows Capital is allowed to manage.

Three Arrows likely accomplished this by leveraging bitcoin, as BTC was always an option to buy GBTC. Three Arrows wanted to do this because its stake in GBTC is a premium yield, taking advantage of the current discount in hopes of regaining a premium or at least market value.

The history of Three Arrows has shown that this was not a wise investment due to the market downturn almost into 2022 and GBTC's structural problems.

Let's return to Hashed and the other VC firms that held Terra's tokens in their liquid portfolios.

One scenario is that some firms used the LUNA they had deployed as collateral for leveraged purchases of additional tokens for both trading and investment in funding rounds that used a Simple Agreement for Future Tokens (SAFT) or other investment vehicle.

It would be a simple task for a fund to enter into an agreement with an over-the-counter counter that pledges the deployed LUNA for cryptocurrencies to buy in SAFT. Once the lock-up period for that particular token expires, the OTC desk could be repaid by profits from that token. And the best part is that this could happen without touching the cash balance.

So if a fund suffers a massive loss in its token portfolio, it impacts the entire ecosystem. After LUNA, VCs have billions less in dry powder to deploy, even if their cash positions are relatively solid.

Max Liao, managing director of Antalpha Technologies, doesn't think this will deter institutional investors. Rather, he is reminded of the dot-com bubble of the early 2000s, when companies died as quickly as they were born. Despite the dozens, if not hundreds, that imploded, taking billions in venture capital with them, that's what gave us Amazon (AMZN), Google (GOOG) and PayPal (PYPL).

"The events of the past few weeks have only underscored that diligence and risk management are also critical factors in making successful venture investments," he told CoinDesk. "It's imperative that aspiring protocols and potential investors remember that world-changing companies learn from their own success as well as the failures of others."

For entrepreneurs and developers, this could mean changing the structure for the next investment to include more cash and fewer tokens.

The problem with cash, however, is that it comes with much more conservative terms, especially in terms of the size of funding rounds and the risk investors are willing to take.

Tech opinion

Bitcoin holds support at $27K-30K; resistance at $35K.

Bitcoin (BTC) has traded in a narrow range between $28,500 and $30,000 over the past week. Despite short-term fluctuations, the cryptocurrency has managed to hold support above $27,000, which could keep some buyers active.

BTC has dropped up to 2% in the last 24 hours.

Momentum signals on the daily chart are improving, similar to what happened in late February and late March. In addition, the Relative Strength Index (RSI) on the daily chart continues to rise from oversold levels, which could indicate a price recovery.

However, the RSI on the daily chart still needs to rise above 50 to determine if a price rally is sustainable.

On the weekly chart, the RSI is more oversold than it has been since March 2020, although the momentum signals remain negative. This suggests that BTC's uptrend may be limited, initially towards the resistance zone between $33,000 and $35,000.

Important Events

World Economic Forum

DC Blockchain Summit

CBDC hearing: digital assets and the future of finance

CoinDesk TV

In case you missed it, here's the latest episode of First Mover on CoinDesk TV:

Tether issues, former BitMEX CEO sentenced to 2 years probation

Investors are feeling the aftermath of the TerraUSD (UST) and LUNA crashes as Tether's market cap drops by $10 billion. Alexandre Lores of Quantum Economics discussed concerns about stablecoins and the crypto companies that back them with First Mover. There's also crypto market analysis from Dexterity Capital's Arpan Gautam and details on the sentencing of former BitMEX CEO Arthur Hayes from CoinDesk's Cheyenne Ligon.


Korean police freeze Luna Foundation Guard assets: Report: police in Seoul are trying to ban the organization from withdrawing suspected misappropriated funds.

China Can't Stop Bitcoin Mining: The reported bitcoin hashrate dropped to zero in China for two months last year, but it has since returned rather abruptly.

Regulators pay attention to UST: The collapse of terraUSD (UST) is the scale moment of algorithmic stablecoins.

Japanese bank Sumitomo Mitsui Trust is looking to set up a depository for digital assets: Report: bank's turn to digital assets comes as global banking shifts toward cryptocurrencies.

Fed survey: 12% of US adults held cryptocurrencies in 2021: This is the first appearance of cryptocurrencies in the Federal Reserve's Economic Well-Being of U.S. Households survey.

Longer text

There was no Terra 'attack': conspiracy theories won't save you from financial reality, says CoinDesk's Chief Insights Columnist.

Today's crypto explainer: what is Bitcoin Pizza Day?

Other Voices: Crypto may have an insider trading problem (The Wall Street Journal)

Said and heard

"Families are seeing day after day the investments they earmarked for down payments, college tuition or retirement shrink. They've seen big retailers like Walmart [WMT] and Target [TGT] post their steepest stock declines in decades this week after earnings signaled an end to the pandemic spending boom. The market turmoil has made corporate leaders wary of taking their companies public. In Silicon Valley, dreams of multibillion-dollar valuations have been replaced by the reality of layoffs and cringing investors." (The Wall Street Journal) ... "Alts are down more than 80 percent from their peak. In 2017, they were over 95 percent. That's another 70 percent decline. My point is that it's dangerous to bet on lows, and if you do, you should get in slowly." (Galaxy Digital CEO Mike Novogratz) ... "Pizza Day brings up the daydream of being a bitcoin billionaire who made one brilliant trade. We all hate the man who made that trade because we want to be like him. We see him as a lucky guy, a lottery winner, and we're envious." (Jimmy Song in Bitcoin Magazine)