Terra Crisis VS how Soros dropped the Pound

We’ve seen the first “exchange rate” crisis in the history of crypto-economics. The Terra/Luna attack will go down in the economic history books.

If you open any classic book of economic history you’ll find we have lived through hundreds of crises like this one, where a currency (the peseta, the Pound, the Lira, …) tries to keep parity with a stronger coin receives a speculative counter-movement that results in a devaluation (or sharp depreciation), or forces the monetary authorities to defend the currency by using a large volume of central reserves or a sharp increase in interest rates.

If you do not believe me, take a look at this table which summarizes the number of exchange rate crises of the peseta, number of crises per year, average duration and impact on GDP.

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Exchange rate crisis are very common in national currencies.

We are living through one of the most difficult episodes for the crypto ecosystem with the attack and collapse of one of its star projects Terra/Luna and its Stable coin that has suffered an “exchange rate” crisis that has knocked it down.

Let’s take as an example when Soros defeated the British central bank and brought down the pound on Black Wednesday 1992.

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This is the sequence of events:

– 1971 Bretton Woods fixed exchange rate system collapses (yes, a system that collapses, a lot happens, and no one starts screaming that it was a Ponzi scheme…).

– December 1971, Smithsonian Accords, the dollar becomes the international reference currency.

– At that time it was decided that European currencies could fluctuate between them +/- 4.5% with respect to the dollar. Sound familiar? Yes, a “stable coin” with a little more margin 😉 This system was called “Snake in the tunnel“.

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 – It lasted until 1973, when inflationary pressures due to the oil crisis (sound familiar?) made the system useless and it was replaced by a new system of European exchange rates (with reference to the Mark, which was the strongest economy).

– In 1979 the European Monetary System and the Exchange Rate Mechanism (ERM) began to operate, which was nothing more than a system that allowed central banks to print or buy currency to guarantee the exchange rate within the fluctuation band. Well, a stable coin, but with central banks behind it. In other words, if the peseta fell more than 4.5% against the German mark, the Bank of Spain would start buying pesetas. No algorithms.

– England (Thatcher) remained outside the European monetary system, with a fluctuating system but within fluctuation margins (let’s call it “Pound Stable Coin”).

– Then came the crisis of the 90’s, inflation soared (in England 9.12% VS Germany 2.97%), the British central bank wanted to cut rates to stimulate the economy but that would weaken its “Pound Stable Coin” and had committed to keep it within maximum fluctuation margins.

– Between 1990 and 1992 it had to buy up huge amounts of pounds to maintain parity and had to keep rates too high to fight the crisis.

– Finally England entered the European ERM (the Exchange Rate Mechanism) with the bad luck that the Bundesbank (which was in charge) was raising its interest rates to fight inflation.

– But it is too late, investors smell blood, as they did with Terra. England needs low rates but can’t, and its Pound can’t be devalued because it is a “stable coin”. This was simply unsustainable. The “markets” charge strongly.

– They start attacking the weaker currencies (the Peseta and the Lira) and they also go after the Pound, they know that sooner or later they will have to devalue it.

– George Soros and other big Hedge Funds earned 1,000 million dollars in a single day that became known as Black Wednesday (coincidentally it is estimated that those who have attacked Terra’s USDT algorithm have been able to earn 950 million dollars…).

The big difference is that behind the Pound or the Peseta there was a Central Bank that decided to pay (print banknotes) and therefore the currency did not disappear like Terra, but there are many cases of national currencies that disappear because of the broken bank of the country.

But that is also an interesting difference. With Terra/Luna many investors have lost money, but that’s it. We are not going to see Korea’s GDP drop 10 points, nor are we going to redistribute the losses among all taxpayers, not even among all crypto investors. The dog is dead, the rabies is over.

  • Is this loss going to emotionally affect the market? Surely.
  • Are all other Stable Coins under surveillance? Of course they are.
  • Has the battle affected the price of BTC because of the forced sales of BTC by Luna/Terra? Yes it has.

But don’t give the crypto economy up for dead, for goodness sake. Cryptoeconomics reproduces some of the flaws of the old economy, it’s how the market works, but it is here to stay.

As economic history has shown us so many times before, a currency is born, it grows, it dies and is replaced by a better one.

As has happened and continues to happen in the traditional economy to national currencies, look at this chart of depreciation of national currencies in 2021:

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Oh, by the way, the Stable coin of Terra was made by “a 30 year old Korean with an algorithm” as they said out there in a derogatory way, instead behind each of these national currencies there is a Central Bank, a government, Ministers of Economy, Cabinets of studies, Professors, media, and they have failed just the same.

And that is just the greatness of Bitcoin, which has no central bank behind it to support it, no one can print more, every day that passes is scarcer. Plain and simple. That is why in the Bitcoin white paper the word dollar does not appear even once, because it is not the reference, let’s not get obsessed with its value with respect to the dollar, just as we do not calculate every day its reference with respect to the Cuban peso, it is not made for that.

We are living a historic moment for the economy, as we lived with the integration of the single European currency, which solved a great part of the exchange rate crisis of many national currencies that were integrated. We needed 30 years of repeating the same crisis to understand that the Peseta should die in favor a stronger coin, tens of crisis to learn the lesson because of stupid patriotic feelings. I think that we will not need so many lesson in crypto to get it.

We will continue to see more and more countries integrating hard (El Salvador) or soft (USA, Singapore, etc.) to this new currency called Bitcoin. The difference here is that BTC does not need any country to adopt it officially. Citizens can freely and independently adopt it directly, wherever they are, whenever they want, and that makes it unstoppable.

Yours in crypto!!