What’s Happening: As of last Friday, the bitcoin price had plunged nearly 50% from its all-time high as traders worried that the Fed’s attempt to combat inflation could send the economy into a tailspin. recession, they abandoned riskier investments.
But in recent days, the implosion of TerraUSD, a high-profile crypto experiment, has fueled deeper anxiety. On Thursday, Tether, a popular “stable coin” heralded as a safe place for crypto investors to park their cash, broke its peg to the US dollar, setting off more alarm bells. The bitcoin price fell as low as $26,350.
“If we see this going on for several days, then we will start to get quite concerned,” Marcus Sotiriou, a crypto analyst at digital asset broker GlobalBlock, told me. “The implications are so big. It’s just unknown.”
Breaking it down: Making sense of the situation requires a quick introduction to stablecoins and their wildest offshoot, algorithmic stablecoins.
Traditional stablecoins like Tether have become the foundation of the cryptocurrency market as they are theoretically fully backed by tangible assets. A digital currency can be redeemed at any time for $1, which serves as a hedge against volatility. Given the notorious market swings, its use among crypto firms, exchanges, and traders has skyrocketed.
The Federal Reserve estimates that the value of stablecoins “grew rapidly over the past year,” topping $180 billion in March.
The boom helped fuel the rise of algorithmic stablecoins like TerraUSD. These coins are also technically worth $1. But they are not backed by tangible assets and instead use financial engineering to maintain their peg.
It is not clear that this is what is happening now. But as stablecoins churn, that’s the risk.
TerraUSD first faltered and broke its peg to the US dollar last weekend. It fell as low as 23 cents on Wednesday before regaining some ground. It was last trading at 58 cents after its creators announced an emergency intervention.
“This is exactly the ‘death spiral’ that a lot of people predicted,” Henry Elder, head of decentralized finance at Wave Financial, a digital asset manager, told me.
Tether was below 99 cents on the dollar, trailing Bitcoin as well. The most popular cryptocurrency, which is supported by a growing number of traditional investors, has plunged 10% in the last 24 hours.
Why it matters: This may seem very strange. After all, crypto assets continue to make up a very small part of the overall financial system. But powerful people like Treasury Secretary Janet Yellen are paying attention, fearful the situation could create nasty and unpredictable aftershocks for investors of all stripes.
“A stablecoin known as TerraUSD experienced a run and its value decreased,” Yellen said when she testified before the Senate earlier this week. “I think that just illustrates that this is a fast-growing product and there are risks to financial stability.”
Inflation slowed, but pressure on prices does not go away
At first glance, the latest US inflation report seemed to contain some good news.
But digging deeper into the data, it seemed less reassuring. Excluding volatility in food and energy prices, core inflation rose 0.6% month-on-month, indicating that costs are rising across a wide range of products.
That is making economists and investors nervous.
“Inflation is no longer contained in the supply chain,” said Jefferies chief economist Aneta Markowska.
Companies have been building up their inventories, which helps ease goods inflation. But prices in the services sector are rising as Americans resume travel and other leisure activities.
Investor Outlook: The news spooked Wall Street, sending the S&P 500 down 1.7%. The index is now 18% below its all-time high recorded in January.
Investors were puzzled as the inflation reading came in worse than expected. Economists surveyed by Refinitiv had expected annual inflation of 8.1%. That could force the Federal Reserve to continue its aggressive withdrawal of support from the economy for longer, hurting riskier bets.
Disney avoided the fate of Netflix. but not all are good news
“The growth of the platform since its launch reinforces its unique nature,” CEO Bob Chapek said on a call with analysts. “We just think Disney+ is unique.”
Hulu and ESPN+ also grew in the last quarter. The company’s services now have almost 206 million users.
Chapek said that Disney+ is still on track to get between 230 million and 260 million subscribers by mid-2024.
That said: Disney shares were initially up after the report, but are now down more than 5% in premarket trading.
A worry? Disney is spending a lot to keep growing. The company’s direct-to-consumer unit lost $887 million last quarter, more than triple the losses from a year ago. Disney blamed “higher programming and production, marketing, and technology costs.”
Until next time
Also today: The US Producer Price Index for April is released at 8:30 am ET.
Coming tomorrow: the University of Michigan consumer confidence survey for May.