Old Mutual Investment Group

Macro Perspective 20/2022 | Cryptocurrency and global markets

May 17, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspective 20/2022 | Cryptocurrency and global markets
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Portfolio Manager, Peter Brooke, shares his latest weekly perspectives, this week unpacking interesting developments in Cryptocurrency and its importance as a market indicator for investors.

Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. And this is Macro Perspective from week 20 of 2022. Firstly, my apologies for the scarcity of voice notes recently, but it took a little while to transition to the new provider. As a result, a lot has happened. But I think the most interesting development recently has actually been in crypto. 


Last week, the breaking of the stable coin Terra and the resultant crash of Lunar wiped out around $40 billion. Being a bit old school and having a strong valuation foundation, I've watched the crypto boom as a bemused bystander. This week's podcast is not to express schadenfreude at the collapse with what looks like a magic money scheme. But because it's got a very genuine importance as a market indicator. 


For those of you don't know, a stable coin is pegged to hold its value against the US dollar, or any other currency for that matter. And it's an important part of the crypto ecosystem. They provide the interface between the intermediated world of money and banks and the disintermediated but volatile world of crypto. And their key attribute is their stability, as they are backed by real US dollars, and need to be transformed or traded at one to one. This is a very familiar construct to us, as we have a long history of currency pegs, ranging from the Asian tigers to the current big pegs of the Hong Kong dollar and the Saudi Arabian Dirham.  


We've been expecting pressure on currency pegs, as the US starts to hike rates. This raises the cost of global capital and forces pain on whoever is maintaining a peg. One of the first pegs to go was the Egyptian pound, which lost 20% in March and had to hike interest rates very sharply. And it's normally the weak that go first. Therefore, it's not surprising that the Terra stable coin collapsed, as this was backed by an algorithm to print more crypto, which is not the strongest security we've ever seen. It reminds me more of the Zimbabwe dollar peg. 


Tether, as distinct from Terra, is the big boy in the stable coin arena with $80 billion of tokens. And last week, that token value broke from $1 down to 95 cents before trading back up to a buck. Now Tether is actually backed by some real assets, or as their CTO says, they have a ton of bonds. Unfortunately, they refuse to reveal how many bonds they actually have. But whatever it is, its small fry compared to the massive backing of $465 billion of reserves the Hong Kong Monetary Authority has, or the $425 billion that the Saudis have. 


The problem as I see it, is that US rate had just started rising, and Fed Chairman Jay Powell has been absolutely crystal clear that pain lies ahead. We can expect a lot more rate hikes and coming fast. Therefore, I think what we've just seen - Terra's collapse - is just the start. And investors have already pulled $7 billion from Tether. This means that they've gained first mover advantage as they've got their money out at parity. And in this type of environment, I'd be focusing on return of capital and not return on capital. And to get that return, you need to have a genuine valuation underpin. 

Good luck out there. Until next week.

The crypto crash – looking at its importance as a market indicator
What is a stable coin? What part does it play in the crypto ecosystem?
The pressure on currency pegs as US hikes interest rates, and the impact on crypto.
What can we expect for the future?